THE LAW PERTAINING TO PRIVATE PERSONAL AND

COMMERCIAL RELATIONS – 18 QUESTIONS

SC Sample Answer

1. Yes, all of the elements of the crime of theft are present.

Under the RPC, the essential elements of theft are:

1. The taking of a personal property;
2. The property taken belongs to another;
3. The taking was done without the owner’s consent;
4. There was intent to gain; and
5. The taking was done without violence against or intimidation of the person or force upon things.

The return of the thing is not an exempting or justifying circumstance.

2. No. Under the Rules, a notary public must be a member of the Philippine Bar.

Here, X’s sole credential civil service eligibility does not satisfy the requirements to apply as a notary public.

Hence, the petition should not be granted.

3. Yes. Under the law, MeTC, MTC and MCTC have EOJ exclusive original jurisdiction over cases of forcible entry
and unlawful detainer.

Here, the RTC of Isabela has no jurisdiction over the complaint for FE.

Hence, the RTC can dismiss it outright.

CIVIL LAW REVIEW NOTES

Compilation of Memory Aid, Frequently Asked Questions in the Bar, Lex Pareto,
QUAMTO and Lecture Notes
By Jaybee D. Pascua (2021)

Civil Law – 12 questions

i. Legal personality, capacity to act

ii. Marital relationships
iii. Property (concept of property, ownership, co-ownership, right of accession, easement, nuisance)
iv. Obligations
v. Contracts (in general, loans and mortgages, interest) vi. Torts, Quasi-delicts
vi. Damages

I. PRELIMINARY TITLE

• Art. 37. Juridical capacity, which is the fitness to be the subject of legal relations, is inherent in every natural
person and is lost only through death. Capacity to act, which is the power to do acts with legal effect, is acquired
and may be lost. (1996 BAR)

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 - Bar: Distinctions:

Juridical capacity Capacity to act

Concept Fitness to be the subject of legal
relations
Whether inherent or Not Inherent in every natural persons
Effect of Death Lost only upon death
Provisional Existence Exists provisionally in an unborn child
for purposes of support and donation
Power to do acts with legal effects
Not inherent in a person but acquired
May be lost upon and even before death
through valid causes
Does not exist even provisionally in an
unborn child.

• Art. 38. Minority, insanity or imbecility, the state of being a deaf-mute, prodigality and civil interdiction are mere
restrictions on capacity to act, and do not exempt the incapacitated person from certain obligations, as when the
latter arise from his acts or from property relations, such as easements.

• When civil personality begins in natural persons: Art. 40. Birth determines personality; but the conceived child
shall be considered born for all purposes that are favorable to it, provided it be born later with the conditions
specified in the following article. (1999,2003,2008 BAR)

- As a general rule, birth determines personality. An exception is the presumptive personality of a conceived child.
It shall be considered born for all purpose that are favorable to it PROVIDED it be BORN ALIVE.
§ Thus, an unborn child is NOT entitled to damages. The action for damages of a husband against an
abortionist may prosper with respect to his own damage – moral damages, etc. However, the unborn child
whose personality never existed may not be entitled to damages for breach of his right to life and dignity.
(Geluz vs. CA, 1961)

• When a child is considered born: Art. 41. For civil purposes, the fetus is considered born if it is alive at the time
it is completely delivered from the mother's womb. However, if the fetus had an intra-uterine life of less than
seven months, it is not deemed born if it dies within twenty-four hours after its complete delivery from the maternal
womb. (1999,2008,2012,2014 BAR)

• Presumption of survivorship: Art. 43. If there is a doubt, as between two or more persons who are called to succeed
each other, as to which of them died first, whoever alleges the death of one prior to the other, shall prove the same;
in the absence of proof, it is presumed that they died at the same time and there shall be no transmission of
rights from one to the other. (1998,1999,2000,2008,2009 BAR)

- By way of exception to the above, under the Rule 131 – Burden of proof and presumptions (Sec. 3) of the RoC,
EXCEPT FOR PURPOSES OF SUCCESSION, when two or more persons perish in the same calamity and it
is not shown who died first, the survivorship is determined from the probabilities resulting from the strength
and ages of the sexes.

• Art. 390. After an absence of seven years, it being unknown whether or not the absentee still lives, he shall be
presumed dead for all purposes, except for those of succession.

The absentee shall not be presumed dead for the purpose of opening his succession till after an absence of
ten years. If he disappeared after the age of seventy-five years, an absence of five years shall be sufficient in order
that his succession may be opened.

• Art. 391. The following shall be presumed dead for all purposes, including the division of the estate among the
heirs:

1) A person on board a vessel lost during a sea voyage, or an aeroplane which is missing, who has not been heard
of for four years since the loss of the vessel or aeroplane;
2) A person in the armed forces who has taken part in war, and has been missing for four years;
3) A person who has been in danger of death under other circumstances and his existence has not been known
for four years.

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 - Effect of Reappearance: Article 392. If the absentee appears, or without appearing his existence is proved,
he shall recover his property in the condition in which it may be found, and the price of any property that may
have been alienated or the property acquired therewith; but he cannot claim either fruits or rents

II. FAMILY CODE

• Art. 1. Marriage is a special contract of permanent union between a man and a woman entered into in accordance
with law for the establishment of conjugal and family life. It is the foundation of the family and an inviolable social
institution whose nature, consequences, and incidents are governed by law and not subject to stipulation, except that
marriage settlements may fix the property relations during the marriage within the limits provided by this Code. (2015
BAR)

• Art. 2. No marriage shall be valid, unless these essential requisites are present:

1) Legal capacity of the contracting parties who must be a male and a female; and

- The parties must be a man and a woman. The sex of a person is determined at the time of one’s birth;
hence, a man remains to be a man despite successfully undergoing sex gender reassignment surgery
(Silverio vs. Republic)
- There must be no impediment to marry; and
- Each party must be at least 18 years old.

2) Consent freely given in the presence of the solemnizing officer. (1996,2009,2014,2015 BAR)

• Art. 3. The formal requisites of marriage are: (1996,2009 BAR)

1) Authority of the solemnizing officer;

- Good faith on the part of the parties will cure the absence of authority if in the nature of mistake of fact.
(Ex: Mistake that the license of the priest has not yet expired)

2) A valid marriage license except in the cases provided for in Chapter 2 of this Title; and

- The absence of marriage license makes the marriage void.

- Art. 33. Marriages among Muslims or among members of the ethnic cultural communities may be
performed validly without the necessity of marriage license, provided they are solemnized in accordance
with their customs, rites or practices.

- Art. 34. No license shall be necessary for the marriage of a man and a woman who have lived together as
husband and wife for at least five years and without any legal impediment to marry each other. The
contracting parties shall state the foregoing facts in an affidavit before any person authorized by law to
administer oaths. The solemnizing officer shall also state under oath that he ascertained the qualifications
of the contracting parties are found no legal impediment to the marriage

- 2016 BAR: Art. 3 of the FC provides that one of the formal requisites of marriage is a valid marriage license
and Art. 4 of the same code states that absence of any of the essential or formal requisites shall render the
marriage void ab initio.

3) A marriage ceremony which takes place with the appearance of the contracting parties before the solemnizing
officer and their personal declaration that they take each other as husband and wife in the presence of not less
than two witnesses of legal age.

- 2008 BAR: Mere IRREGULARITY in any of the formal requisites will not invalidate the marriage.
However, the party responsible for the irregularity may be made liable. Examples: 1)Where no party resides
in the place of the marriage license; 2) Ceremony not in the church of the priest or chamber of the judge;
3) Marriage outside the territorial jurisdiction of the judge; 4) Absence of two witnesses.

- Absence of any of the Formal and essential requisite makes the marriage void.

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• Art. 4. The absence of any of the essential or formal requisites shall render the marriage void ab initio, except
as stated in Article 35 (2).

A defect in any of the essential requisites shall not affect the validity of the marriage but the party or parties
responsible for the irregularity shall be civilly, criminally and administratively liable.

• Art. 5. Any male or female of the age of eighteen years or upwards not under any of the impediments mentioned in
Articles 37 and 38, may contract marriage.

• Art. 6. No prescribed form or religious rite for the solemnization of the marriage is required. It shall be necessary,
however, for the contracting parties to appear personally before the solemnizing officer and declare in the
presence of not less than two witnesses of legal age that they take each other as husband and wife. This declaration
shall be contained in the marriage certificate which shall be signed by the contracting parties and their witnesses and
attested by the solemnizing officer.

In case of a marriage in articulo mortis, when the party at the point of death is unable to sign the marriage certificate,
it shall be sufficient for one of the witnesses to the marriage to write the name of said party, which fact shall be
attested by the solemnizing officer.

• Art. 7. Marriage may be solemnized by: (1994,1995,1999,2006 BAR)

1) Any incumbent member of the judiciary within the court's jurisdiction;

2) Any priest, rabbi, imam, or minister of any church or religious sect duly authorized by his church or
religious sect and registered with the civil registrar general, acting within the limits of the written authority
granted by his church or religious sect and provided that at least one of the contracting parties belongs to
the solemnizing officer's church or religious sect;

- 2006 BAR: Irregularity in the solemnization of marriage applies only the mistake of fact and not mistake
of law. Believing that the minister had authority to solemnize the marriage even if none of the contracting
parties was a member of the Minister’s religious sect is a mistake of law. Hence, the marriage solemnized
shall be considered void ab initio being the absence of the authority of the solemnizing officer.

3) Any ship captain or airplane chief only in the case mentioned in Article 31;

- Art. 31. A marriage in articulo mortis between passengers or crew members may also be solemnized by a
ship captain or by an airplane pilot not only while the ship is at sea or the plane is in flight, but also during
stopovers at ports of call.

4) Any military commander of a unit to which a chaplain is assigned, in the absence of the latter, during a military
operation, likewise only in the cases mentioned in Article 32;

- Art. 32. A military commander of a unit, who is a commissioned officer, shall likewise have authority to
solemnize marriages in articulo mortis between persons within the zone of military operation, whether
members of the armed forces or civilians.

5) Any consul-general, consul or vice-consul in the case provided in Article 10.

- For marriage between Filipino citizens abroad.
- Consuls and vice consuls are not authorized to solemnize marriage

6) Municipal and City Mayors. (Sec. 444 LGC)

• Article. 8. The marriage shall be solemnized publicly in the chambers of the judge or in open court, in the church,
chapel or temple, or in the office the consul-general, consul or vice-consul, as the case may be, and not elsewhere,
except in cases of marriages contracted on the point of death or in remote places in accordance with Article 29 of
this Code, or where both of the parties request the solemnizing officer in writing in which case the marriage may be
solemnized at a house or place designated by them in a sworn statement to that effect. (57a)

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• Art. 26. All marriages solemnized outside the Philippines, in accordance with the laws in force in the country where
they were solemnized, and valid there as such, shall also be valid in this country, except those prohibited under
Articles 35 (1), (4), (5) and (6), 3637 and 38.

Where a marriage between a Filipino citizen and a foreigner is validly celebrated and a divorce is thereafter
validly obtained abroad by the alien spouse capacitating him or her to remarry, the Filipino spouse shall have
capacity to remarry under Philippine law.

- 2002, 2004, 2006, 2009, 2010, 2012, 2016 BAR: The Supreme Court ruled that Art. 26, par. 2 should be
interpreted to include cases involving parties, who, at the time of the celebration of the marriage were Filipino
citizens, but later on, one of them becomes naturalized as a foreign citizen and obtains a divorce decree. The
reckoning point is not their citizenship at the time of the celebration of marriage, but their citizenship at the
time the divorce decree is obtained abroad by the alien spouse capacitating him/her to marry. (Republic v.
Orbecido, 2005)

- Rule: A divorce validly obtained abroad by the alien spouse, capacitating him/her to remarry can allow the
Filipino to remarry. The reckoning point is not the citizenship of the parties at the time of the celebration of
their marriage, but their citizenship at the time a valid divorce is obtained abroad by the alien spouse capacitating
the latter to remarry.

• Art. 27. In case either or both of the contracting parties are at the point of death, the marriage may be solemnized
without necessity of a marriage license and shall remain valid even if the ailing party subsequently survives. (1995
BAR)

- Marriages excepted from marriage license requirement:

1) in articulo mortis
2) in a remote place
3) of people who have cohabited for 5 years at least
4) marriage between pagans or mohammedans who live in non-Christian provinces and who married in
accordance with their customs.

• Art. 31. A marriage in articulo mortis between passengers or crew members may also be solemnized by a ship captain
or by an airplane pilot not only while the ship is at sea or the plane is in flight, but also during stopovers at
ports of call. (1995 BAR)

• Art. 34. No license shall be necessary for the marriage of a man and a woman who have lived together as husband
and wife for at least five years and without any legal impediment to marry each other. The contracting parties
shall state the foregoing facts in an affidavit before any person authorized by law to administer oaths. The
solemnizing officer shall also state under oath that he ascertained the qualifications of the contracting parties are
found no legal impediment to the marriage. (2002,2008 BAR)

VOID AND VOIDABLE MARRIAGE

(2002,2004, 2005, 2006, 2007, 2008, 2009, 2012, 2013, 2014, 2015, 2016 BAR)

• Void ab initio marriages: Art. 35. The following marriages shall be void from the beginning:

1) Those contracted by any party below eighteen years of age even with the consent of parents or guardians;
2) Those solemnized by any person not legally authorized to perform marriages unless such marriages were
contracted with either or both parties believing in good faith that the solemnizing officer had the legal authority
to do so;
3) Those solemnized without license, except those covered the preceding Chapter;
4) Those bigamous or polygamous marriages not failing under Article 41;
5) Those contracted through mistake of one contracting party as to the identity of the other; and
6) Those subsequent marriages that are void under Article 53. (failure to record in the civil registry and registries
of property the judgment of annulment or of absolute nullity of marriage, the partition and delivery of
presumptive legitime. (2004,2005,2006 BAR)

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• Art. 36. A marriage contracted by any party who, at the time of the celebration, was psychologically incapacitated to
comply with the essential marital obligations of marriage, shall likewise be void even if such incapacity becomes
manifest only after its solemnization. (2002,2006,2012,2013,2014,2015,2016 BAR)

- Psychological incapacity must be characterized by: (JIG)

1) gravity
2) juridical antecedence, and
3) incurability

- The incapacity must be grave or serious such that the party would be incapable or inability to perform essential
marital obligation; it must be rooted in the history of the party antedating the marriage although the overt
manifestations may emerge only after marriage; and it must be incurable or, even if it otherwise, the cure would
be beyond the means of the party involved.

- For psychological incapacity to be a ground of nullity, it must be shown that it was rooted in the history of the
party alleged to be suffering from it, it must be grave and serious, and incurable such that it renders the person
incapacitated to perform the essential marital obligations due to causes psychological in nature.

- The incapacity must be existing at the time of the celebration of marriage

- The incapacity must be permanent or incurable
- The illness is grave enough to prevent the party from assuming the essential marital obligations.
- Expert opinion is no longer mandatory so long as the totality of the evidence is sufficient enough to establish
the psychological incapacity.

• Art. 37. Marriages between the following are incestuous and void from the beginning, whether relationship between
the parties be legitimate or illegitimate: (VOID FOR BEING INCESTOUS)

1) Between ascendants and descendants of any degree; and

2) Between brothers and sisters, whether of the full or half blood.

• Art. 38. The following marriages shall be void from the beginning for reasons of public policy:

1) Between collateral blood relatives whether legitimate or illegitimate, up to the fourth civil degree;
2) Between step-parents and step-children;
3) Between parents-in-law and children-in-law;
4) Between the adopting parent and the adopted child;
5) Between the surviving spouse of the adopting parent and the adopted child;
6) Between the surviving spouse of the adopted child and the adopter;
7) Between an adopted child and a legitimate child of the adopter;
8) Between adopted children of the same adopter; and
9) Between parties where one, with the intention to marry the other, killed that other person's spouse, or
his or her own spouse. (1999,2007,2008, 2017 BAR)

- NOT VOID due to relationship. There is no prohibition with respect to the following and therefore the
marriage between them is valid: (1) Brother-in-law and sister-in-law; (2) stepbrother and stepsister; (3) Guardian
and ward; and (4) Adopted and illegitimate child of the adopter.

• Art. 39. The action or defense for the declaration of absolute nullity shall not prescribe. However, in case of
marriage celebrated before the effectivity of this Code and falling under Article 36, such action or defense shall
prescribe in ten years after this Code shall taken effect. (2002,2006 BAR)

- A void marriage may be questioned by any interested party in any proceeding where the resolution of the issue
is material. (Ninal vs. Bayadog)

• Art. 40. The absolute nullity of a previous marriage may be invoked for purposes of remarriage on the basis solely
of a final judgment declaring such previous marriage void. (1991, 1993 BAR)

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 - may be invoked only for purpose of remarriage.

• Art. 41. A marriage contracted by any person during subsistence of a previous marriage shall be null and void,
unless before the celebration of the subsequent marriage, the prior spouse had been absent for four consecutive
years and the spouse present has a well-founded belief that the absent spouse was already dead. In case of
disappearance where there is danger of death under the circumstances set forth in the provisions of Article 391 of
the Civil Code, an absence of only two years shall be sufficient.

For the purpose of contracting the subsequent marriage under the preceding paragraph the spouse present must
institute a summary proceeding as provided in this Code for the declaration of presumptive death of the
absentee, without prejudice to the effect of reappearance of the absent spouse. (2005,2008,2013,2017 BAR)

- Due diligence required for well-founded belief. – There must be showing of due diligence in determining
if the absent spouse is already dead. Without the exercise of due diligence, it cannot be said that there is
well-founded belief.

- Reappearance by ABSENT spouse, AUTOMATICALLY TERMINATES the second marriage, unless the
marriage was already declared annulled or null and void. Effects of termination of Second Marriage: Art. 43 -
The termination of the subsequent marriage shall produce the following effects:

1) The children of the subsequent marriage conceived prior to its termination shall be considered legitimate;

2) The absolute community of property or the conjugal partnership, as the case may be, shall be dissolved
and liquidated, but if either spouse contracted said marriage in bad faith, his or her share of the net profits
of the community property or conjugal partnership property shall be forfeited in favor of the common
children or, if there are none, the children of the guilty spouse by a previous marriage or in default of
children, the innocent spouse;

3) Donations by reason of marriage shall remain valid, except that if the donee contracted the marriage in
bad faith, such donations made to said donee are revoked by operation of law;

4) The innocent spouse may revoke the designation of the other spouse who acted in bad faith as
beneficiary in any insurance policy, even if such designation be stipulated as irrevocable; and

5) The spouse who contracted the subsequent marriage in bad faith shall be disqualified to inherit from the
innocent spouse by testate and intestate succession.

• Art. 44. If both spouses of the subsequent marriage acted in bad faith, said marriage shall be void ab initio and all
donations by reason of marriage and testamentary dispositions made by one in favor of the other are revoked by
operation of law.

• Art. 45. A marriage may be annulled for any of the following causes, existing at the time of the marriage:
(2003,30006,2007,2009 BAR)

1) That the party in whose behalf it is sought to have the marriage annulled was eighteen years of age or over
but below twenty-one, and the marriage was solemnized without the consent of the parents, guardian or
person having substitute parental authority over the party, in that order, unless after attaining the age of twenty-
one, such party freely cohabited with the other and both lived together as husband and wife;

- Who must be filed and when (Art. 47): by the party whose parent or guardian did not give his or her
consent, within five years after attaining the age of twenty-one, or by the parent or guardian or person
having legal charge of the minor, at any time before such party has reached the age of twenty-one
- 1990 BAR: If the spouse attain the age of more than 21, he himself should file the complaint.

2) That either party was of unsound mind, unless such party after coming to reason, freely cohabited with the
other as husband and wife;

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 - Who must be filed and when (Art. 47): by the same spouse, who had no knowledge of the other's
insanity; or by any relative or guardian or person having legal charge of the insane, at any time before
the death of either party, or by the insane spouse during a lucid interval or after regaining sanity

3) That the consent of either party was obtained by fraud, unless such party afterwards, with full knowledge of
the facts constituting the fraud, freely cohabited with the other as husband and wife;

- Art. 46. Any of the following circumstances shall constitute fraud: (CoPSeD)

1) Non-disclosure of a previous conviction by final judgment of the other party of a crime involving
moral turpitude;

2) Concealment by the wife of the fact that at the time of the marriage, she was pregnant by a man
other than her husband;

3) Concealment of sexually transmissible disease, regardless of its nature, existing at the time of
the marriage; or

- 1991 BAR: Good Faith is not a defense when the ground for annulment is STD on the part
of either party.

4) Concealment of drug addiction, habitual alcoholism or homosexuality or lesbianism existing

at the time of the marriage.

No other misrepresentation or deceit as to character, health, rank, fortune or chastity shall

constitute such fraud as will give grounds for action for the annulment of marriage.

- Who must be filed and when (Art. 47): by the injured party, within five years after the discovery of
the fraud;

4) That the consent of either party was obtained by force, intimidation or undue influence, unless the same
having disappeared or ceased, such party thereafter freely cohabited with the other as husband and wife;

- Who must be filed and when (Art. 47): by the injured party, within five years from the time the force,
intimidation or undue influence disappeared or ceased

5) That either party was physically incapable of consummating the marriage with the other, and such incapacity
continues and appears to be incurable; or (Impotency)

- Who must be filed and when (Art. 47): by the injured party, within five years after the marriage
- 1995 BAR: Joseph knew that Yvette was HIV positive at the time of the marriage. He is, therefore, not
an injured party. The FC gives the right to annul the marriage only to an injured party.

6) That either party was afflicted with a sexually-transmissible disease found to be serious and appears to be
incurable.

- Who must be filed and when (Art. 47): by the injured party, within five years after the marriage

- The STD must be: 1) existing at the time of marriage; 2) found to be serious and incurable; 3) unknown
to the other party.

- Effects of Ratification: The Voidable Marriage cannot be annulled because of RATIFICATION in the
following cases: Freely cohabiting with the other upon reaching 21, or after coming to reason, or after the party
against whom the fraud was committed obtains full knowledge of the facts constituting fraud or if the grounds
for vitiated consent already disappeared (for ground 1 to 4 above).

• Art. 50. The effects provided for by paragraphs (2), (3), (4) and (5) of Article 43 and by Article 44 shall also apply in
the proper cases to marriages which are declared ab initio or annulled by final judgment under Articles 40 and 45.
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 The final judgment in such cases shall provide for the liquidation, partition and distribution of the properties of
the spouses, the custody and support of the common children, and the delivery of the presumptive legitimes,
unless such matters had been adjudicated in previous judicial proceedings.

All creditors of the spouses as well as of the absolute community or the conjugal partnership shall be notified
of the proceedings for liquidation.

In the partition, the conjugal dwelling and the lot on which it is situated, shall be adjudicated in accordance with
the provisions of Articles 102 and 129. (2013,2014 BAR)

- Delivery of presumptive legitimes during the lifetime of the parents in the following cases:

1) legal separation
2) annulment of marriages
3) declaration of nullity of marriage
4) automatic termination of a subsequent marriage by reappearance of the absent spouse.

• Art. 51. In said partition, the value of the presumptive legitimes of all common children, computed as of the
date of the final judgment of the trial court, shall be delivered in cash, property or sound securities, unless the
parties, by mutual agreement judicially approved, had already provided for such matters.

The children or their guardian or the trustee of their property may ask for the enforcement of the judgment.

The delivery of the presumptive legitimes herein prescribed shall in no way prejudice the ultimate successional
rights of the children accruing upon the death of either of both of the parents; but the value of the properties already
received under the decree of annulment or absolute nullity shall be considered as advances on their legitime. (1991
BAR)

• Art. 52. The judgment of annulment or of absolute nullity of the marriage, the partition and distribution of the
properties of the spouses and the delivery of the children's presumptive legitimes shall be recorded in the appropriate
civil registry and registries of property; otherwise, the same shall not affect third persons. (1990,1991,1993 BAR)

• Art. 54. Children conceived or born before the judgment of annulment or absolute nullity of the marriage under
Article 36 has become final and executory shall be considered legitimate. Children conceived or born of the
subsequent marriage under Article 53 shall likewise be legitimate. (1990,2010 BA)

LEGAL SEPARATION
(2002, 2003, 2006, 2007, 2012 BAR)

• Art. 55. A petition for legal separation may be filed on any of the following grounds:

1) Repeated physical violence or grossly abusive conduct directed against the petitioner, a common child, or
a child of the petitioner;
2) Physical violence or moral pressure to compel the petitioner to change religious or political affiliation;
3) Attempt of respondent to corrupt or induce the petitioner, a common child, or a child of the petitioner, to
engage in prostitution, or connivance in such corruption or inducement;
4) Final judgment sentencing the respondent to imprisonment of more than six years, even if pardoned;
5) Drug addiction or habitual alcoholism of the respondent;
6) Lesbianism or homosexuality of the respondent;
7) Contracting by the respondent of a subsequent bigamous marriage, whether in the Philippines or abroad;
8) Sexual infidelity or perversion;
9) Attempt by the respondent against the life of the petitioner; or
10) Abandonment of petitioner by respondent without justifiable cause for more than one year.

For purposes of this Article, the term "child" shall include a child by nature or by adoption. (9a)

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 - Effort to Reconcile – The court must take steps toward reconciliation otherwise it cannot declare legal
separation.
- 2012 BAR: Every act of sexual liaison is a ground for legal separation.
- 2006 BAR: Petition for Legal Separation may be filed only by the aggrieved spouse.

• Art. 56. The petition for legal separation shall be denied on any of the following grounds: (C4PG)

1) Where the aggrieved party has condoned the offense or act complained of;
2) Where the aggrieved party has consented to the commission of the offense or act complained of;
3) Where there is connivance between the parties in the commission of the offense or act constituting the ground
for legal separation;
4) Where both parties have given ground for legal separation;
5) Where there is collusion between the parties to obtain decree of legal separation; or
6) Where the action is barred by prescription.

• Art. 57. An action for legal separation shall be filed within five years from the time of the occurrence of the
cause.

- Effects of Decree of Legal Separation:

1) The spouses shall be entitled to live separately from each other but the marriage bond is not severed
2) The absolute community or conjugal partnership shall be dissolved and liquidated.
3) The custody of the minor children shall be awarded to the innocent spouse subject to the provisions of
Art. 213 of the Code.
4) The offending spouse shall be disqualified from inheriting from the innocent spouse by intestate
succession and the provisions in favor of the offending spouse made in the will of the innocent spouse
shall be revoked by operation of law.
5) The innocent spouse may revoke the donations made by him/her in favor of the offending spouse,
as well as the designation of the latter as beneficiary in any insurance policy, even the designation be
irrevocable.

MARITAL RIGHTS AND OBLIGATIONS

• Art. 68. The husband and wife are obliged to live together, observe mutual love, respect and fidelity, and render
mutual help and support. (2010 BAR)

PROPERTY RELATIONS BETWEEN HUSBAND AND WIFE

(2000, 2002, 2004, 2005, 2006, 2008, 2009, 2010, 2012, 2015, 2016 BAR)

• Art. 75. The future spouses may, in the marriage settlements, agree upon the regime of absolute community, conjugal
partnership of gains, complete separation of property, or any other regime. In the absence of a marriage settlement,
or when the regime agreed upon is void, the system of absolute community of property as established in this Code
shall govern. (1995,2005 BAR)

• Art. 76. In order that any modification in the marriage settlements may be valid, it must be made before the
celebration of the marriage, subject to the provisions of Articles 66, 67, 128, 135 and 136. (2005 BAR)

• Art. 77. The marriage settlements and any modification thereof shall be in writing, signed by the parties and executed
before the celebration of the marriage. They shall not prejudice third persons unless they are registered in the local
civil registry where the marriage contract is recorded as well as in the proper registries of properties. (2005 BAR)

• Art. 84. If the future spouses agree upon a regime other than the absolute community of property, they cannot
donate to each other in their marriage settlements more than one-fifth of their present property. Any excess shall
be considered void.

Donations of future property shall be governed by the provisions on testamentary succession and the formalities
of wills. (1991 BAR)
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 - Donations by reason of marriage, requirements:

1) It must be made before celebration of marriage

2) It must be made in consideration of marriage
3) In favor of one or both or future spouses; and
4) It must comply with the formalities of donation

- Limit: Future spouses cannot donate to each other in their marriage settlements more than one-fifth of their
present property. Any excess shall be considered void.

• Art. 86. A donation by reason of marriage may be revoked by the donor in the following cases: (1996 BAR)

1) If the marriage is not celebrated or judicially declared void ab initio except donations made in the marriage
settlements, which shall be governed by Article 81;
2) When the marriage takes place without the consent of the parents or guardian, as required by law;
3) When the marriage is annulled, and the donee acted in bad faith;
4) Upon legal separation, the donee being the guilty spouse;
5) If it is with a resolutory condition and the condition is complied with;
6) When the donee has committed an act of ingratitude as specified by the provisions of the Civil Code on
donations in general.

• Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the
marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family
rejoicing. The prohibition shall also apply to persons living together as husband and wife without a valid marriage.

- 1977 BAR: Art. 87 of the FC provides that every donation or grant of gratuitous advantage, direct or indirect,
between the spouses during the marriage shall be void, except moderate gifts which the spouses may give each
other on the occasion of any family rejoicing. The prohibition shall also apply to person living together as
husband and wife without a valid marriage. In the present case, H made a donation to W during their common
law relationship. Hence, the prohibition against donation applies to them.

SYSTEM OF ABSOLUTE COMMUNITY

• Art. 88. The absolute community of property between spouses shall commence at the precise moment that the
marriage is celebrated. Any stipulation, express or implied, for the commencement of the community regime at
any other time shall be void.

• Art. 90. The provisions on co-ownership shall apply to the absolute community of property between the spouses
in all matters not provided for in this Chapter. (1992 BAR)

• Art. 91. Unless otherwise provided in this Chapter or in the marriage settlements, the community property shall
consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired
thereafter. (1992,1995,2015 BAR)

• Art. 92. The following shall be excluded from the community property: (GPD)

1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the
income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part
of the community property;

2) Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community
property;

3) Property acquired before the marriage by either spouse who has legitimate descendants by a former
marriage, and the fruits as well as the income, if any, of such property. (1995 BAR)

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• Art. 93. Property acquired during the marriage is presumed to belong to the community, unless it is proved that
it is one of those excluded therefrom. (1994 BAR)

• Art. 94. The absolute community of property shall be liable for: (2007 BAR)

1) The support of the spouses, their common children, and legitimate children of either spouse; however, the
support of illegitimate children shall be governed by the provisions of this Code on Support;

2) All debts and obligations contracted during the marriage by the designated administrator-spouse for the
benefit of the community, or by both spouses, or by one spouse with the consent of the other;

3) Debts and obligations contracted by either spouse without the consent of the other to the extent that the
family may have been benefited;

4) All taxes, liens, charges and expenses, including major or minor repairs, upon the community property;

5) All taxes and expenses for mere preservation made during marriage upon the separate property of either
spouse used by the family;

6) Expenses to enable either spouse to commence or complete a professional or vocational course, or other
activity for self-improvement;

7) Antenuptial debts of either spouse insofar as they have redounded to the benefit of the family;

8) The value of what is donated or promised by both spouses in favor of their common legitimate children for the
exclusive purpose of commencing or completing a professional or vocational course or other activity for self-
improvement;

9) Antenuptial debts of either spouse other than those falling under paragraph (7) of this Article, the support of
illegitimate children of either spouse, and liabilities incurred by either spouse by reason of a crime or a quasi-
delict, in case of absence or insufficiency of the exclusive property of the debtor-spouse, the payment of which
shall be considered as advances to be deducted from the share of the debtor-spouse upon liquidation of the
community; and

10) Expenses of litigation between the spouses unless the suit is found to be groundless.

If the community property is insufficient to cover the foregoing liabilities, except those falling under paragraph
(9), the spouses shall be solidarily liable for the unpaid balance with their separate properties.

• Art. 95. Whatever may be lost during the marriage in any game of chance, betting, sweepstakes, or any other kind of
gambling, whether permitted or prohibited by law, shall be borne by the loser and shall not be charged to the
community but any winnings therefrom shall form part of the community property.

• Art. 96. The administration and enjoyment of the community property shall belong to both spouses jointly. In case
of disagreement, the husband's decision shall prevail, subject to recourse to the court by the wife for proper
remedy, which must be availed of within five years from the date of the contract implementing such decision.

In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the
common properties, the other spouse may assume sole powers of administration. These powers do not include
disposition or encumbrance without authority of the court or the written consent of the other spouse. In the
absence of such authority or consent, the disposition or encumbrance shall be void. However, the transaction shall
be construed as a continuing offer on the part of the consenting spouse and the third person, and may be
perfected as a binding contract upon the acceptance by the other spouse or authorization by the court before the
offer is withdrawn by either or both offerors. (2013,2015 BAR)

• Art. 99. The absolute community terminates: (2009 BAR)

1) Upon the death of either spouse;

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 2) When there is a decree of legal separation;

3) When the marriage is annulled or declared void; or

4) In case of judicial separation of property during the marriage under Article 134 to 138.

CONJUGAL PARTNERSHIP PROPERTY

- this governs only of the same is stipulated in a valid marriage settlement.

• Art. 106. Under the regime of conjugal partnership of gains, the husband and wife place in a common fund the
proceeds, products, fruits and income from their separate properties and those acquired by either or both
spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net
gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise
agreed in the marriage settlements. (1997,1998 BAR)

• Art. 109. The following shall be the exclusive property of each spouse: (1998 BAR)

1) That which is brought to the marriage as his or her own;

2) That which each acquires during the marriage by gratuitous title;
3) That which is acquired by right of redemption, by barter or by exchange with property belonging to only
one of the spouses; and
4) That which is purchased with exclusive money of the wife or of the husband.

• Art. 116. All property acquired during the marriage, whether the acquisition appears to have been made, contracted
or registered in the name of one or both spouses, is presumed to be conjugal unless the contrary is proved.

• Art. 117. The following are conjugal partnership properties: (2004,2005,2008 BAR)

1) Those acquired by onerous title during the marriage at the expense of the common fund, whether the
acquisition be for the partnership, or for only one of the spouses;
2) Those obtained from the labor, industry, work or profession of either or both of the spouses;
3) The fruits, natural, industrial, or civil, due or received during the marriage from the common property,
as well as the net fruits from the exclusive property of each spouse;
4) The share of either spouse in the hidden treasure which the law awards to the finder or owner of the property
where the treasure is found;
5) Those acquired through occupation such as fishing or hunting;
6) Livestock existing upon the dissolution of the partnership in excess of the number of each kind brought to the
marriage by either spouse; and
7) Those which are acquired by chance, such as winnings from gambling or betting. However, losses therefrom
shall be borne exclusively by the loser-spouse.

• Art. 120. The ownership of improvements, whether for utility or adornment, made on the separate property of
the spouses at the expense of the partnership or through the acts or efforts of either or both spouses shall pertain to
the conjugal partnership, or to the original owner-spouse, subject to the following rules:

When the cost of the improvement made by the conjugal partnership and any resulting increase in value are more
than the value of the property at the time of the improvement, the entire property of one of the spouses shall
belong to the conjugal partnership, subject to reimbursement of the value of the property of the owner-spouse
at the time of the improvement; otherwise, said property shall be retained in ownership by the owner-spouse,
likewise subject to reimbursement of the cost of the improvement. (2102 BAR)

- Accessory follows the principal: When the cost of the improvement made by the conjugal partnership and
any resulting increase in value are LESS than the value of the property at the time of the improvement, the
property shall be retained in ownership by the owner-spouse.

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 - Reverse accession: When the cost of the improvement made by the conjugal partnership and any resulting
increase in value are MORE than the value of the property at the time of the improvement, the entire property
of one of the spouses shall belong to the conjugal partnership, subject to reimbursement of the value of the
property

In either case, the ownership of the entire property shall be vested upon the reimbursement, which shall be made
at the time of the liquidation of the conjugal partnership.

• Art. 122. The payment of personal debts contracted by the husband or the wife before or during the marriage shall
not be charged to the conjugal properties partnership except insofar as they redounded to the benefit of the
family.

Neither shall the fines and pecuniary indemnities imposed upon them be charged to the partnership.

However, the payment of personal debts contracted by either spouse before the marriage, that of fines and
indemnities imposed upon them, as well as the support of illegitimate children of either spouse, may be enforced
against the partnership assets after the responsibilities enumerated in the preceding Article have been covered, if the
spouse who is bound should have no exclusive property or if it should be insufficient; but at the time of the
liquidation of the partnership, such spouse shall be charged for what has been paid for the purpose above-mentioned.
(2000,2005 BAR)

- Personal obligations incurred by either spouse is not chargeable against the conjugal partnership unless proven
that these have redounded to the benefit of the family (Ayala Investment v. Ching)

• Art. 123. Whatever may be b in any game of chance or in betting, sweepstakes, or any other kind of gambling
whether permitted or prohibited by law, shall be borne by the loser and shall not be charged to the conjugal
partnership but any winnings therefrom shall form part of the conjugal partnership property.

• Art. 124. The administration and enjoyment of the conjugal partnership shall belong to both spouses jointly. In
case of disagreement, the husband's decision shall prevail, subject to recourse to the court by the wife for proper
remedy, which must be availed of within five years from the date of the contract implementing such decision.

In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the
conjugal properties, the other spouse may assume sole powers of administration. These powers do not include
disposition or encumbrance without authority of the court or the written consent of the other spouse. In the
absence of such authority or consent, the disposition or encumbrance shall be void. However, the transaction shall
be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected
as a binding contract upon the acceptance by the other spouse or authorization by the court before the offer is
withdrawn by either or both offerors. (2000,2002,2013 BAR)

• Art. 134. In the absence of an express declaration in the marriage settlements, the separation of property between
spouses during the marriage shall not take place except by judicial order. Such judicial separation of property may
either be voluntary or for sufficient cause.

SEPARATION OF PROPERTY

• Art. 135. Any of the following shall be considered sufficient cause for judicial separation of property: (CA3PS)

1) That the spouse of the petitioner has been sentenced to a penalty which carries with it civil interdiction;
2) That the spouse of the petitioner has been judicially declared an absentee;
3) That loss of parental authority of the spouse of petitioner has been decreed by the court;
4) That the spouse of the petitioner has abandoned the latter or failed to comply with his or her obligations
to the family as provided for in Article 101;
5) That the spouse granted the power of administration in the marriage settlements has abused that power; and
6) That at the time of the petition, the spouses have been separated in fact for at least one year and reconciliation
is highly improbable.

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 In the cases provided for in Numbers (1), (2) and (3), the presentation of the final judgment against the
guilty or absent spouse shall be enough basis for the grant of the decree of judicial separation of property. (2003
BAR)

• Art. 136. The spouses may jointly file a verified petition with the court for the voluntary dissolution of the
absolute community or the conjugal partnership of gains, and for the separation of their common properties.

All creditors of the absolute community or of the conjugal partnership of gains, as well as the personal creditors of
the spouse, shall be listed in the petition and notified of the filing thereof. The court shall take measures to protect
the creditors and other persons with pecuniary interest. ( 2005BAR)

- Effects of Decree of Separation:

1) The ACP or CPG shall be liquidated;

2) Rights previously acquired by creditors should be respected;
3) Both spouses shall BEAR the family expenses in proportion to their income, or in case of insufficiency
or default thereof, the current market value of the their separate properties; and
4) The liabilities of the spouses to creditors for family expenses shall be solidary.

PROPERTY REGIME OF UNIONS WITHOUT MARRIAGE

• Property regime of unions without marriage, where parties have NO legal impediment to marry: Art. 147.
When a man and a woman who are capacitated to marry each other, live exclusively with each other as husband
and wife without the benefit of marriage or under a void marriage, their wages and salaries shall be owned by
them in equal shares and the property acquired by both of them through their work or industry shall be governed
by the rules on co-ownership.

In the absence of proof to the contrary, properties acquired while they lived together shall be presumed to
have been obtained by their joint efforts, work or industry, and shall be owned by them in equal shares. For
purposes of this Article, a party who did not participate in the acquisition by the other party of any property shall be
deemed to have contributed jointly in the acquisition thereof if the former's efforts consisted in the care and
maintenance of the family and of the household.

Neither party can encumber or dispose by acts inter vivos of his or her share in the property acquired during
cohabitation and owned in common, without the consent of the other, until after the termination of their
cohabitation.

When only one of the parties to a void marriage is in good faith, the share of the party in bad faith in the
co-ownership shall be forfeited in favor of their common children. In case of default of or waiver by any or all of
the common children or their descendants, each vacant share shall belong to the respective surviving
descendants. In the absence of descendants, such share shall belong to the innocent party. In all cases, the
forfeiture shall take place upon termination of the cohabitation. (1997,2000,2006,2009,2010,2012,2014,2015 BAR)

- Co-ownership: The law on co-ownership applies with respect to the properties acquired by both through their
work or industry if:

1) Common-law spouses WITHOUT IMPEDIMENT – When a man and a woman who are capacitated
to marry each other, live exclusively with each other as husband and wife without the benefit of
marriage
2) Void marriage – spouses are without impediment.

- Art. 147 applies to void marriage under Art. 36.

- Compared to Art. 43. It should be noted that the rules under Art. 43 is different from the rules under Art. 147
although they both apply to void marriage. The difference, however, is that Art. 43 applies only to those
marriages that are void Under Art. 40 as well as those that are voidable under Art. 45. Thus, outside of those
cases, the above-stated rules under Art. 147 apply.

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 - SAMPLE ANSWER: Tony and Susan are entitled to the house and lot with each of them getting equal shares.
Since they are common-law spouses without impediment to marry each other, their property relations is
governed by the laws on special co-ownership. In addition, under Art. 147 of the FC, when a man and a woman
who are capacitated to marry each other, live exclusively with each other as husband and wife without the
benefit of marriage, the property acquired during their cohabitation are presumed to have been obtained by
their joint efforts, work or industry and shall be owned by them in equal shares. The equal share is maintained
even if the efforts of one of them consisted merely in his or her care and maintenance of the family and of the
household.

However, it would make difference if Tony is lawfully married to another. Only properties acquired by
them through their actual joint contribution of money, property or industry shall be owned by them in common
in proportion to their respective contributions. (Art. 148). Since Susan did not contribute to the acquisition of
the house and lot, she has no share in the property.

• Property regime of unions without marriage, where parties have WITH legal impediment to marry: Art. 148.
In cases of cohabitation not falling under the preceding Article, only the properties acquired by both of the
parties through their actual joint contribution of money, property, or industry shall be owned by them in
common in proportion to their respective contributions. In the absence of proof to the contrary, their
contributions and corresponding shares are presumed to be equal. The same rule and presumption shall apply to
joint deposits of money and evidences of credit.

If one of the parties is validly married to another, his or her share in the co-ownership shall accrue to the absolute
community or conjugal partnership existing in such valid marriage. If the party who acted in bad faith is not validly
married to another, his or her shall be forfeited in the manner provided in the last paragraph of the preceding Article.

The foregoing rules on forfeiture shall likewise apply even if both parties are in both bad faith. (2000,20062009,2012
BAR)

III. PROPERTY

• Art. 415. The following are immovable property: (1997,2007 BAR)

1) Land, buildings, roads and constructions of all kinds adhered to the soil;
2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable;
3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom
without breaking the material or deterioration of the object; (2007 BAR)
4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner
of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements;
5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or
works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of
the said industry or works;

- Requisites: 1) must have been placed there by the owner of the building or the piece of land; 2) the owner
must have been intended by the owner for an industry or work; 3) The machinery, receptacle, instrument
or implement must tend to meet directly the needs of the industry or work.

- Machinery may be installed by the agent of the owner BUT NOT by the tenant, usufructuary or any other
person having only temporary right unless such persons acted as an agent of the owner. Exception: The
tenant can be considered an agent of the owner, for instance, if the contract of lease provides that any
machine installed by the tenant on the leased premises shall belong to the owner upon the expiration of
the lease without compensation.

- 1995 BAR: When there is a provision in the lease contract making the lessor, at the end of the lease owner
of the machinery installed by the lessee, the said machinery is considered to have been installed by the
lessor through the lessee who acted merely as his agent. Having been installed by the owner of the
tenement, the machinery became immovable under Art. 415 of the NCC.

16
 6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner
has placed them or preserves them with the intention to have them permanently attached to the land, and
forming a permanent part of it; the animals in these places are included;
7) Fertilizer actually used on a piece of land;
8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or
stagnant;
9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place
on a river, lake, or coast; (2007 BAR: Floating platform of petroleum operation facility is considered immovable
as it is intended to remain permanently where it is situated even if it is tethered to a ship which is anchored to
the seabed)
10) Contracts for public works, and servitudes and other real rights over immovable property.

• Art. 416. The following things are deemed to be personal property: (1995 BAR)
1) Those movables susceptible of appropriation which are not included in the preceding article;
2) Real property which by any special provision of law is considered as personal property;
3) Forces of nature which are brought under control by science; and
4) In general, all things which can be transported from place to place without impairment of the real property
to which they are fixed.

• Art. 417. The following are also considered as personal property:

1) Obligations and actions which have for their object movables or demandable sums; and
2) Shares of stock of agricultural, commercial and industrial entities, although they may have real estate.

OWNERSHIP

- It is the right to enjoy, dispose and recover a thing without further limitations than those established by law or
the will of the owner.

• Art. 427. Ownership may be exercised over things or rights.

• Art. 428. The owner has the right to enjoy and dispose of a thing, without other limitations than those established
by law.

The owner has also a right of action against the holder and possessor of the thing in order to recover it.

• Art. 429. The owner or lawful possessor of a thing has the right to exclude any person from the enjoyment and
disposal thereof. For this purpose, he may use such force as may be reasonably necessary to repel or prevent
an actual or threatened unlawful physical invasion or usurpation of his property.

- Doctrine of Self-help: Based on the principle of self-defense. The requisites are:

1) There must be actual or threatened physical invasion or usurpation
2) Reasonable force is exercised – Force can only be used at the time when the possession is disturbed or
immediately after actual dispossession.
3) The Force is exercised by the owner or lawful possessor
4) There is no delay in the exercise.

• Art. 430. Every owner may enclose or fence his land or tenements by means of walls, ditches, live or dead hedges,
or by any other means without detriment to servitudes constituted thereon.

• Art. 432. The owner of a thing has no right to prohibit the interference of another with the same, if the
interference is necessary to avert an imminent danger and the threatened damage, compared to the damage
arising to the owner from the interference, is much greater. The owner may demand from the person benefited
indemnity for the damage to him.

- Doctrine of State of Necessity or incomplete privilege. Requisites:

1) Interference is necessary because of an imminent and threatened damage, and
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 2) the damage to another is much greater than damage to the property interfered with.

• Art. 433. Actual possession under claim of ownership raises disputable presumption of ownership. The true
owner must resort to judicial process for the recovery of the property. (2008 BAR)

• Art. 438. Hidden treasure belongs to the owner of the land, building, or other property on which it is found.

Nevertheless, when the discovery is made on the property of another, or of the State or any of its subdivisions, and
by chance, one-half thereof shall be allowed to the finder. If the finder is a trespasser, he shall not be entitled to
any share of the treasure.

If the things found be of interest to science of the arts, the State may acquire them at their just price, which shall be
divided in conformity with the rule stated. (2008,2010,2014 BAR)

- The Code of Commission which drafted the new Civil Code, that the words “and by chance” are intended by
the Commission to mean “and by good luck”. Hence, they not preclude a finder who purposely hunts for
hidden treasure. In the case at bar, there was an element of uncertainty in the discovery because there was
actually no assurance that B would find a treasure on the land of A.

• Art. 439. By treasure is understood, for legal purposes, any hidden and unknown deposit of money, jewelry, or
other precious objects, the lawful ownership of which does not appear. (2008, 2014 BAR)

- General Rule: Art. 438. Hidden treasure belongs to the owner of the land, building, or other property on
which it is found.

- Exception: If the finder is not the owner, the owner is entitled to only ½ and the finder is entitled to the other
½ provided that:

1) Discovery was made on the property of another, or on the state or any of its political subivisions;
2) The finding was made by chance (or by stroke of good luck as example one who looks for hidden
treasure on the property of another with the latter’s permission)
3) The finder is not a co-owner of the property where it is found; and
4) The finder is not a trespasser.

- No known owner: it is necessary that no known owner appears.

- The usufructuary is treated as a stranger if he finds hidden treasure on the property that is the object of the
usufruct.

Right of Accession

- It is a right by virtue of which the owner of a thing becomes the owner of everything that the thing may produce
or which may be inseparably united or incorporated thereto, either naturally or artificially.

- Accession is not a mode of acquiring ownership; it is an attribute of ownership.

• Art. 440. The ownership of property gives the right by accession to everything which is produced thereby, or which
is incorporated or attached thereto, either naturally or artificially.

• Art. 441. To the owner belongs:

1) The natural fruits;

2) The industrial fruits;
3) The civil fruits.

• Art. 442. Natural fruits are the spontaneous products of the soil, and the young and other products of animals.

Industrial fruits are those produced by lands of any kind through cultivation or labor.
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 Civil fruits are the rents of buildings, the price of leases of lands and other property and the amount of perpetual
or life annuities or other similar income.

• Art. 443. He who receives the fruits has the obligation to pay the expenses made by a third person in their
production, gathering, and preservation. (2009 BAR)

- This rule applies to a possessor in bad faith where the owner of the land has succeeded in recovering the land
after the said possessor in bad faith has harvested the crop planted thereon.

- The provision DOES NOT apply if the possessor in BF has not yet gathered the fruits when the owner
recovered the land. It is Art. 449 that applies if the possessor has not yet gathered the fruit before the recovery
by the owner of the land. The possessor loses what he planted without indemnity.

- 2008 BAR answer: Anthony cannot be made to account for the fruits he gathered before he was served with
summons. A possessor in GF is entitled to the fruits received before the possession was legally interrupted by
the service of summons. After Anthony was served with summons, he became a possessor in BF and BPS in
BF. He can also be made to account for the fruits but he may deduct expenses or production gathering and
preservation of the fruits.

- 2008 BAR answer: the value of the standing crops must be prorated depending upon the period of possession
and the period of possession and the period of growing and producing the fruits. Anthony is entitled to a part
of the net harvest and a part of expenses of cultivation in proportion to his period of possession. Carlo may
appropriate the respective parts of the subject to prorating the respective periods of possession. However,
Carlos may allow Anthony to gather these growing fruits as indemnity for the expenses of cultivation. If
Anthony refuses to accept the concession, he shall lose the right to indemnity under Art. 443.

• Art. 445. Whatever is built, planted or sown on the land of another and the improvements or repairs made thereon,
belong to the owner of the land, subject to the provisions of the following articles.

• Art. 447. The owner of the land who makes thereon, personally or through another, plantings, constructions or
works with the materials of another, shall pay their value; and, if he acted in bad faith, he shall also be obliged to
the reparation of damages. The owner of the materials shall have the right to remove them only in case he can
do so without injury to the work constructed, or without the plantings, constructions or works being destroyed.
However, if the landowner acted in bad faith, the owner of the materials may remove them in any event, with a
right to be indemnified for damages. (1999 BAR)

- Rules if the LO himself is the BPS and he used the materials of another:

Landowner (L) who is the Builder, Planter, Sower Owner of the Materials (OM)
(BPS)
FIRST CASE
GF GF
The LO shall has the right to acquire the building, etc., - The OM has the right to remove materials if without
after paying indemnity for value of materials injury to work or without plantings or constructions
being destroyed
- Receive indemnity for value of materials
SECOND CASE
BF GF
The right to acquire the materials after paying the value - Remove the materials in any event
of the materials and indemnity for damages but subject - Be indemnified for damages
to the preferred right of OM to remove.
THIRD CASE
GF BF
Acquire the materials without paying indemnity Lose materials without the right to be indemnified
FOURTH CASE
BF BF
Apply the principle that the BF of one party neutralizes the BF of the other party; hence both shall be considered
as having acted in GF.
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• Art. 448. The owner of the land on which anything has been built, sown or planted in good faith, shall have the
right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in
articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed,
the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably
more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does
not choose to appropriate the building or trees after proper indemnity. The parties shall agree upon the terms
of the lease and in case of disagreement, the court shall fix the terms thereof. (2000,2001,2013,2015 BAR)

- Rules when the Land is claimed by 2 parties: 1) The LO and 2) the BPS (Arts. 448,449,450)

a. BPS: A BPS in GF is one who is not aware of the flaw or defect in his title. He believes or thinks that he
is the owner and asserts ownership. Contrarily, he is in BF if he acted knowing that he is not the owner
of the subject land or knowing that there is a flaw in his title.

- 1990, 2013 BAR: A builder in GF is someone who occupies the property in the concept of an
owner.

- Co-owner – Art. 448 cannot apply where a co-owner builds, plants or sows on the land owned in
common for then he did not build, plant or sow upon land that exclusively belongs to another
but of which he is a co-owner.

- Lessee, Usufructuary or Trustee – Art. 448 is not also applicable if the BPS is a tenant,
usufructuary or trustee who recognizes that another person is the owner.

b. Landowner: A landowner is in GF if he is not aware that somebody is building, planting or sowing on

his land or if he was aware he objected or did what is reasonable under the circumstances to prevent the
builder, planter or sower from invading his property. He is in BF if he was aware of the actions of the
BPS and he did not object thereto.

Landowner (LO) who is the Builder, Planter, Sower Builder, Planter, Sower (BPS)
(BPS)
FIRST CASE
GF GF
LO has the option to: In case LO exercises No. 2., B has the right to retain until
indemnity is paid and cannot be required to pay rent.
1. Sell the land to BP or collect rent from S, unless the value
of the land is considerably greater than building etc., in
which case, BP shall pay rent under the terms fixed by the
parties; or
2. acquire improvement after paying indemnity which could
either be:

a. original cost of improvements

b. increase in the value of the whole

Notes: 1) the choice belongs to the LO. 2) however, the BP in

GF can, compel the LO to make a choice; 3) The LO must
choose one or the options. For example: He cannot compel the
owner of the building to immediately remove the building from
the land.

SECOND CASE
GF BF
1. Option to: 1. Lose improvements and plants without a right to be
indemnified
a. Acquire the improvements without paying indemnity 2. Recover necessary expenses for preservation of land
and collect damages or 3. Pay damages to LO
b. sell the land to BP or rent it to S, and collect damages;
or
c. order demolition of work or restoration to former
condition and collect damages.

2. Pay BPS necessary expenses for preservation

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 THIRD CASE
BF GF
1. LO must indemnify BPS for the improvements and pay 1. Preferred right to remove the improvement in any even;
damages (unless BPS will remove) and/or
2. Cannot compel the BPS to buy land 2. Be indemnified of the damages

FOURTH CASE
BF BF
Same as though both acted in GF

- Rules if THREE persons are involved: 1) LO; 2) BPS; and 3) OM

LO BPS OM
FIRST CASE
GF GF GF
1. Option to: 1. Right of retention for necessary and 1. Collect value of materials
useful expenses primarily from BPS and
a. acquire improvements and pay subsidiarily from LO if former is
indemnity to BPS insolvent
b. i) Sell to BP except the value of 2. Keep building etc. without indemnity
land is considerably more; then to OM and collect damages from him 2. Remove materials only if he can
forced lease; ii) rent to S without injury

2. Without subsidiary liability for cost

of materials

SECOND CASE
GF GF BF
1. Option to: 1. Right of retention for necessary and 1. Lose materials without right to
useful expenses indemnity
a. acquire improvements and pay
indemnity to BPS
b. i) sell to BP except if value of land 2. Keep building etc. without 2. Pay damages
is considerably more; then forced indemnity to OM and collect
lease; ii) rent to S damages from him

2. Without subsidiary liability for cost

of materials
THIRD CASE
GF BF BF
1. Option to: 1. Recover necessary expenses for land 1. Recover value from BPS (in pari
preservation delicto)
a. acquire improvements without
paying indemnity and collect 2. loses improvements without right to 2. IF BPS acquired improvements,
damages indemnity from LO unless LO sells remove materials if possible
b. demolition/restoration plus the land without injury
damages
c. sell to BP or collect rent from S 3. No action against LO and may
plus damages be liable for damages

2. pay necessary expenses to BPS

FOURTH CASE
BF BF BF

Same as though all acted in good faith (in pari delicto)

FIFTH CASE
BF GF GF
1. Acquired improvements after paying 1. remove improvements 1. Remove materials if possible
indemnity and damages to BPS, without injury
unless the latter decides to remove
2. be indemnified for damages in any 2. collect value of materials
2. Subsidiarily liable to OM for event primarily from BPS; subsidiary
materials from LO

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 SIXTH CASE
BF BF GF
1. acquire improvements after 1. Right of retention for necessary 1. Collect value of materials
indemnity expenses primarily from BPS; subsidiarily
from LO
2. subsidiarily liable to OM for 2. Pay value of materials to OM and
materials pay him damages 2. collect damages
3. a) sell to BP except if value is 3. If BPS acquired improvements,
considerably more; b) rent to S remove materials.

SEVENTH CASE
GF BF GF
1. Option to: 1. Recover necessary expenses 1. Collect value of materials
primarily from BPS with
a. acquire without paying indemnity 2. Loses improvements without damages or subsidiarily from LO
and collect damages indemnity from LO unless LO sells without damages
b. sell to BP or rent to S and collect the land 2. Remove materials in any event if
damages 3. Loses right of retention BPS acquired materials
c. demolish/restore and collect 4. Pay damages to LO
damages 5. Primarily liable to pay value of
materials plus damages
2. Pay necessary expenses to BPS
3. Subsidiarily liable to OM without
damages

EIGHT CASE
BF GF BF
Acquire improvements and pay indemnity 1. Indemnity for damages No indemnity; loses materials
and damages to BPS unless the latter 2. remove improvements in any event
decides to remove

- 2000 BAR answer: Under Art. 448 of the NCC in relation to Art. 546, the builder in GF is entitled to a
refund of the necessary and useful expenses incurred by him or the increase in value which the land may have
acquired by reason of the improvement, at the option of the landowner. The builder is entitled to a refund of
the expenses he incurred, and not to the market value of the improvement.

- Good faith is always to be presumed in the absence of proof to the contrary.

• Art. 449. He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown
without right to indemnity. (1996,2000 BAR)

• Art. 450. The owner of the land on which anything has been built, planted or sown in bad faith may demand the
demolition of the work, or that the planting or sowing be removed, in order to replace things in their former
condition at the expense of the person who built, planted or sowed; or he may compel the builder or planter to
pay the price of the land, and the sower the proper rent. (2008 BAR)

• Art. 451. In the cases of the two preceding articles, the landowner is entitled to damages from the builder, planter
or sower.

• Art. 452. The builder, planter or sower in bad faith is entitled to reimbursement for the necessary expenses of
preservation of the land.

• Art. 453. If there was bad faith, not only on the part of the person who built, planted or sowed on the land of
another, but also on the part of the owner of such land, the rights of one and the other shall be the same as
though both had acted in good faith.

It is understood that there is bad faith on the part of the landowner whenever the act was done with his knowledge
and without opposition on his part. (1999,2013 BAR)

22
• Art. 454. When the landowner acted in bad faith and the builder, planter or sower proceeded in good faith, the
provisions of article 447 shall apply.

• Art. 455. If the materials, plants or seeds belong to a third person who has not acted in bad faith, the owner of
the land shall answer subsidiarily for their value and only in the event that the one who made use of them has no
property with which to pay.

This provision shall not apply if the owner makes use of the right granted by article 450. If the owner of the materials,
plants or seeds has been paid by the builder, planter or sower, the latter may demand from the landowner the value
of the materials and labor.

• Art. 457. To the owners of lands adjoining the banks of rivers belong the accretion which they gradually receive
from the effects of the current of the waters. (2001,2003,2008,2009,2016, 2017 BAR)

- BAR: The accretion, however, does not automatically become registered land. It must be brought under the
Torrens system of registration by Benjamin, the riparian owner. Since he did not, then the increment, not being
registered land, was open to acquisition through prescription by third persons, like Daniel. (Grande v. CA, 1962)

• Art. 459. Whenever the current of a river, creek or torrent segregates from an estate on its bank a known portion
of land and transfers it to another estate, the owner of the land to which the segregated portion belonged retains
the ownership of it, provided that he removes the same within two years. (2001,2014 BAR)

• Art. 460. Trees uprooted and carried away by the current of the waters belong to the owner of the land upon
which they may be cast, if the owners do not claim them within six months. If such owners claim them, they shall
pay the expenses incurred in gathering them or putting them in a safe place.

• Art. 461. River beds which are abandoned through the natural change in the course of the waters ipso facto
belong to the owners whose lands are occupied by the new course in proportion to the area lost. However, the
owners of the lands adjoining the old bed shall have the right to acquire the same by paying the value thereof,
which value shall not exceed the value of the area occupied by the new bed.

• Art. 472. If by the will of their owners two things of the same or different kinds are mixed, or if the mixture occurs
by chance, and in the latter case the things are not separable without injury, each owner shall acquire a right
proportional to the part belonging to him, bearing in mind the value of the things mixed or confused.

Quieting of Title

• Article 476. Whenever there is a cloud on title to real property or any interest therein, by reason of any instrument,
record, claim, encumbrance or proceeding which is apparently valid or effective but is in truth and in fact invalid,
ineffective, voidable, or unenforceable, and may be prejudicial to said title, an action may be brought to remove
such cloud or to quiet the title.

An action may also be brought to prevent a cloud from being cast upon title to real property or any interest
therein.

- 2005 BAR: Under Sec. 48 of PD 1529, the Property Registration Decree, a torrens title shall not be subject to
collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with
law. The ejectment proceeding does not provide the proper forum for the cancellation of Don’s Title.

CO-OWNERSHIP

- 1993, 2000 BAR answer: Redemption by one co-owner inures to the benefit of all (Adile vs. CA, 1988). Sylvia,
however, is entitled to be reimbursed the shares of her two sisters in the redemption price.

• Article 484. There is co-ownership whenever the ownership of an undivided thing or right belongs to different
persons.

In default of contracts, or of special provisions, co-ownership shall be governed by the provisions of this Title.
23
• Article 485. The share of the co-owners, in the benefits as well as in the charges, shall be proportional to their
respective interests. Any stipulation in a contract to the contrary shall be void.

The portions belonging to the co-owners in the co-ownership shall be presumed equal, unless the contrary is
proved. (1992 BAR)

• Article 487. Any one of the co-owners may bring an action in ejectment.

- Right to recover: A co-owner may file an action to recover possession of the co-owned property from third
person. This provision covers all kinds of actions for the recovery of possession. A co-owner may file an action
for forcible entry and unlawful detainer, recovery of possession and recovery of ownership.
§ A co-owner may bring such an action without the necessity of joining all the other co-owners as co-
plaintiffs because the suit is presumed to have been filed to benefit his co-owners.

- Rights of each co-owner with respect to his ideal share or undivided interest:

1) The right to alienate, sell, or mortgage the undivided interest;

2) The right to substitute another in enjoyment unless personal rights are affected;
3) The right to redeem the share of a co-owner if the latter sells the same (Art. 1623)

- How acts of co-owners should be decided

Preservation of the Thing Management or Administration Alteration or Acts of Ownership

One co-owner may decide to perform
with prior notice
Note: Absence of Notice will only
result in reduction of amount to be
reimbursed but the act is still valid.
Financial Majority must approve – co-
owners representing the majority
interest.
Unanimity is required.
Note: When one of the co-owners
unreasonably withholds his consent, the
other co-owners may ask the help of the
court.

Examples: Examples: Examples:

1. Payment of real estate taxes 1. Change of the color paint 1. Sale or mortgage
2. Making necessary repairs 2. Construction of fence 2. Lease for more than 1 year or
3. Filing an ejectment case or other registered lease. (Reason: Real rights is
action of recovery of possession. created)

• Article 488. Each co-owner shall have a right to compel the other co-owners to contribute to the expenses of
preservation of the thing or right owned in common and to the taxes. Any one of the latter may exempt himself
from this obligation by renouncing so much of his undivided interest as may be equivalent to his share of the
expenses and taxes. No such waiver shall be made if it is prejudicial to the co-ownership. (1992 BAR)

• Article 489. Repairs for preservation may be made at the will of one of the co-owners, but he must, if practicable,
first notify his co-owners of the necessity for such repairs. Expenses to improve or embellish the thing shall be
decided upon by a majority as determined in article 492. (1992 BAR)

- BAR: Expenses to improve the thing owned in common must be decided upon by majority of the co-owners
who represent the controlling interest (Art. 489 and 492)

• Article 490. Whenever the different stories of a house belong to different owners, if the titles of ownership do
not specify the terms under which they should contribute to the necessary expenses and there exists no agreement
on the subject, the following rules shall be observed:

1) The main and party walls, the roof and the other things used in common, shall be preserved at the expense
of all the owners in proportion to the value of the story belonging to each;

24
 2) Each owner shall bear the cost of maintaining the floor of his story; the floor of the entrance, front door,
common yard and sanitary works common to all, shall be maintained at the expense of all the owners pro
rata;
3) The stairs from the entrance to the first story shall be maintained at the expense of all the owners pro rata,
with the exception of the owner of the ground floor; the stairs from the first to the second story shall be
preserved at the expense of all, except the owner of the ground floor and the owner of the first story; and so
on successively.

• Article 491. None of the co-owners shall, without the consent of the others, make alterations in the thing owned
in common, even though benefits for all would result therefrom. However, if the withholding of the consent by
one or more of the co-owners is clearly prejudicial to the common interest, the courts may afford adequate
relief. (2008 BAR)

- Alterations include any act of strict dominion or ownership and any encumbrance or disposition has been held
implicity to be an act of alteration. The construction of a house on the co-owned property is an act of dominion.
Therefore, it is an alteration falling under Art. 491 of the Civil Code.

• Article 492. For the administration and better enjoyment of the thing owned in common, the resolutions of the
majority of the co-owners shall be binding.

There shall be no majority unless the resolution is approved by the co-owners who represent the controlling
interest in the object of the co-ownership.

Should there be no majority, or should the resolution of the majority be seriously prejudicial to those interested
in the property owned in common, the court, at the instance of an interested party, shall order such measures as
it may deem proper, including the appointment of an administrator.

Whenever a part of the thing belongs exclusively to one of the co-owners, and the remainder is owned in common,
the preceding provision shall apply only to the part owned in common. (1992 BAR)

• Article 493. Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining
thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment,
except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-
owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the
co-ownership. (1998,2014 BAR)

- BAR answer: The sale to X shall not bind the 1/3 share of B and shall be deemed to cover only the 2/3 share
of A and C in the land (art. 493). B shall have the right to redeem the 2/3 share sold to X by A and C since X
is a third person.

- Until a partition is made among co-owners, no one of them can claim particular portion of an undivided
property as exclusively as his own. That portion can only be ascertained until such time as the co-ownership
shall have ceased. (Gonzales v. Ichon, 1951)

• Article 494. No co-owner shall be obliged to remain in the co-ownership. Each co-owner may demand at any time
the partition of the thing owned in common, insofar as his share is concerned.

Nevertheless, an agreement to keep the thing undivided for a certain period of time, not exceeding ten years,
shall be valid. This term may be extended by a new agreement.

A donor or testator may prohibit partition for a period which shall not exceed twenty years.

Neither shall there be any partition when it is prohibited by law.

No prescription shall run in favor of a co-owner or co-heir against his co-owners or co-heirs so long as he expressly
or impliedly recognizes the co-ownership. (2000, 2002, 2008, 2012, 2009, 2015 BAR)

- 2015 BAR: The law provides that none of the co-owners shall be obliged to remain in the co-ownership and it
is the right of a co-owner to ask for partition of the co-ownership anytime. One exception to the rule is if the
25
 co-owners agree to keep the thing undivided which period shall not exceed TEN years. In this case, the
agreement to keep the thing undivided for 20 years shall NOT be valid, at most shall be valid only for TEN
years.

- Acquisitive prescription in favor of co-owner: As a GR, the co-owners (including heirs) cannot acquire the
share of the their other co-owners by acquisitive prescription. The possession of a co-owner is like that of a
trustee. Hence, in order that possession of a co-owner or trustee may be deemed to be adverse to the cestui que
trust or other co-owners, the following requisites must concur:

1) The co-owner or trustee has performed UNEQUIVOCAL ACTS of REPUDIATION amounting to

ouster of the cestui que trust or other co-owners;
2) The POSITIVE ACTS of repudiation has been made KNOWN to the cestui que trust or other co-
owners; and
3) The evidence thereof must be clear and convincing.

Note: Aside from proof of adverse possession, all other requirements of acquisitive prescription must
be complied with.

- BAR answer: Possession by a co-owner is deemed not adverse to the other co-owners but is, on the contrary,
deemed beneficial to them (Pangan vs. CA). Ramon’s possession will become adverse only when he has
repudiated the co-ownership and such repudiation was made to Rosario.

• Article 495. Notwithstanding the provisions of the preceding article, the co-owners cannot demand a physical
division of the thing owned in common, when to do so would render it unserviceable for the use for which it
is intended. But the co-ownership may be terminated in accordance with article 498.

• Article 496. Partition may be made by agreement between the parties or by judicial proceedings. Partition shall be
governed by the Rules of Court insofar as they are consistent with this Code. (1998 BAR)

• Article 497. The creditors or assignees of the co-owners may take part in the division of the thing owned in
common and object to its being effected without their concurrence. But they cannot impugn any partition
already executed, unless there has been fraud, or in case it was made notwithstanding a formal opposition presented
to prevent it, without prejudice to the right of the debtor or assignor to maintain its validity.

• Article 498. Whenever the thing is essentially indivisible and the co-owners cannot agree that it be allotted to one
of them who shall indemnify the others, it shall be sold and its proceeds distributed.

• Article 501. Every co-owner shall, after partition, be liable for defects of title and quality of the portion assigned
to each of the other co-owners.

EASEMENTS IN GENERAL

- It is a real right, constituted on the corporeal immovable property of another, by virtue of which the owner of
he latter has to refrain from doing or must allow something to be done on his property, for the benefit of
another person or tenement.

- Characteristics:

1) Real right. it is a real right; it must be registered in order to affect third persons;
2) Involves immovable property: it is an encumbrance on another corporeal immovable (not personal
property)
3) Different owners. It is an encumbrance on the property belonging to another
4) If it is a Real Easement: it is for the benefit of another immovable. If it is a personal easement, it is for
the benefit of persons or community
5) Inseparability: it is inseparable from the estate to which it is attached; the easement follows the servient
estate when it is alienated.
6) Indivisibility: it is indivisible even if the estates are divided

26
 a) If the servient estate is divided between two or more persons, the easement is not modified;
b) If the dominant estate is divided, each one may use the easement in its entirety, without changing
the place of its use, or making it more burdensome.

7) No possession: There is no transfer of possession, only burden is imposed; and

8) Cannot change estate benefited: The owner of the dominant estate cannot use the easement except for
the benefit of the immovable originally contemplated.

• Art. 613. An easement or servitude is an encumbrance imposed upon an immovable for the benefit of another
immovable belonging to a different owner.

The immovable in favor of which the easement is established is called the dominant estate; that which is subject
thereto, the servient estate. (1995 BAR)

• Art. 615. Easements may be continuous or discontinuous, apparent or nonapparent.

Continuous easements are those the use of which is or may be incessant, without the intervention of any act of
man.

Discontinuous easements are those which are used at intervals and depend upon the acts of man.

Apparent easements are those which are made known and are continually kept in view by external signs that
reveal the use and enjoyment of the same.

Nonapparent easements are those which show no external indication of their existence. (1998 BAR)

• Art. 616. Easements are also positive or negative.

A positive easement is one which imposes upon the owner of the servient estate the obligation of allowing
something to be done or of doing it himself, and a negative easement, that which prohibits the owner of the
servient estate from doing something which he could lawfully do if the easement did not exist. (1998 BAR)

• Art. 617. Easements are inseparable from the estate to which they actively or passively belong. (2001,2010 BAR)

• Art. 619. Easements are established either by law or by the will of the owners. The former are called legal and the
latter voluntary easements.

• Art. 620. Continuous and apparent easements are acquired either by virtue of a title or by prescription of ten years.

• Art. 621. In order to acquire by prescription the easements referred to in the preceding article, the time of possession
shall be computed thus: in positive easements, from the day on which the owner of the dominant estate, or the
person who may have made use of the easement, commenced to exercise it upon the servient estate; and in
negative easements, from the day on which the owner of the dominant estate forbade, by an instrument
acknowledged before a notary public, the owner of the servient estate, from executing an act which would be
lawful without the easement. (2009 BAR)

• Art. 622. Continuous nonapparent easements, and discontinuous ones, whether apparent or not, may be
acquired only by virtue of a title. (2005 BAR)

• Art. 624. The existence of an apparent sign of easement between two estates, established or maintained by the owner
of both, shall be considered, should either of them be alienated, as a title in order that the easement may continue
actively and passively, unless, at the time the ownership of the two estates is divided, the contrary should be
provided in the title of conveyance of either of them, or the sign aforesaid should be removed before the execution
of the deed. This provision shall also apply in case of the division of a thing owned in common by two or more
persons. (2014 BAR)

• Art. 626. The owner of the dominant estate cannot use the easement except for the benefit of the immovable
originally contemplated. Neither can he exercise the easement in any other manner than that previously established.
27
 Modes of Extinguishment of Easements

• Art. 631. Easements are extinguished: (2001,2010 BAR)

1) By merger in the same person of the ownership of the dominant and servient estates;
2) By nonuser for ten years; with respect to discontinuous easements, this period shall be computed from the
day on which they ceased to be used; and, with respect to continuous easements, from the day on which an
act contrary to the same took place;
3) When either or both of the estates fall into such condition that the easement cannot be used; but it shall
revive if the subsequent condition of the estates or either of them should again permit its use, unless when
the use becomes possible, sufficient time for prescription has elapsed, in accordance with the provisions of the
preceding number;
4) By the expiration of the term or the fulfillment of the condition, if the easement is temporary or conditional;
5) By the renunciation of the owner of the dominant estate;
6) By the redemption agreed upon between the owners of the dominant and servient estates.

- 2001 BAR: Under Art. 617, easements are inseparable from the estate to which they actively or passively belong.
Once it attaches, it can only be extinguished under Art. 631, and they exist even if they are not stated or
annotated as an encumbrance on the Torrens title of the servient estate.

• Art. 637. Lower estates are obliged to receive the waters which naturally and without the intervention of man
descend from the higher estates, as well as the stones or earth which they carry with them.

The owner of the lower estate cannot construct works which will impede this easement; neither can the owner
of the higher estate make works which will increase the burden. (2002 BAR)

Easement of Right of Way

- 2010 BAR: The easement of right of way is a real right which attaches to, and is inseparable from, the estate to
which it belongs.
- 2005 BAR: Don did not acquire an easement of right of way. His passage through Ernie’s land was by mere
tolerance. He cannot claim to have acquired the easement of right of way by prescription, because this easement
is discontinuous although apparent. Only continuous and apparent easements can be acquired by prescription
of 10 years of uninterrupted use and enjoyment.

• Art. 649. The owner, or any person who by virtue of a real right may cultivate or use any immovable, which is
surrounded by other immovables pertaining to other persons and without adequate outlet to a public
highway, is entitled to demand a right of way through the neighboring estates, after payment of the proper
indemnity.

Should this easement be established in such a manner that its use may be continuous for all the needs of the dominant
estate, establishing a permanent passage, the indemnity shall consist of the value of the land occupied and the
amount of the damage caused to the servient estate.

In case the right of way is limited to the necessary passage for the cultivation of the estate surrounded by others
and for the gathering of its crops through the servient estate without a permanent way, the indemnity shall consist
in the payment of the damage caused by such encumbrance.

This easement is not compulsory if the isolation of the immovable is due to the proprietor's own acts.
(2005,2010,2013 BAR)

- Requisites:

1) There an estate that is surrounded by other immovable

2) There must be no adequate outlet to a public highway
3) There must be payment of indemnity
4) It is demanded by the owner or one with real right (like a usufructuary)
5) The isolation must not be due to the claimant own’s act
28
 6) The easement must be established at the point LEAST prejudicial to the servient estate – not necessarily
the shortest distance. (The rule that the easement of right of way shall be established at the point least
prejudicial to the servient estate is controlling)

• Art. 650. The easement of right of way shall be established at the point least prejudicial to the servient estate, and,
insofar as consistent with this rule, where the distance from the dominant estate to a public highway may be the
shortest. (1996,2000,2005,2010,2013 BAR)

- 1996, 2013 BAR: However, the SC has consistently rule that in case both criteria cannot be complied with, the
right of way shall be established at the point least prejudicial to the servient estate.

• Art. 651. The width of the easement of right of way shall be that which is sufficient for the needs of the dominant
estate, and may accordingly be changed from time to time. (1993 BAR)

• Art. 652. Whenever a piece of land acquired by sale, exchange or partition, is surrounded by other estates of the
vendor, exchanger, or co-owner, he shall be obliged to grant a right of way without indemnity.

In case of a simple donation, the donor shall be indemnified by the donee for the establishment of the right of
way.

• Art. 653. In the case of the preceding article, if it is the land of the grantor that becomes isolated, he may demand a
right of way after paying a indemnity. However, the donor shall not be liable for indemnity.

Easement of Light and View

• Art. 667. No part-owner may, without the consent of the others, open through the party wall any window or
aperture of any kind.

- this wall divides two estates and is governed by Co-ownership

• Art. 668. The period of prescription for the acquisition of an easement of light and view shall be counted:
1) From the time of the opening of the window, if it is through a party wall; or
2) From the time of the formal prohibition upon the proprietor of the adjoining land or tenement, if the
window is through a wall on the dominant estate. (2014 BAR)

• Art. 669. When the distances in article 670 are not observed, the owner of a wall which is not party wall, adjoining
a tenement or piece of land belonging to another, can make in it openings to admit light at the height of the ceiling
joints or immediately under the ceiling, and of the size of thirty centimeters square, and, in every case, with an iron
grating imbedded in the wall and with a wire screen.

Nevertheless, the owner of the tenement or property adjoining the wall in which the openings are made can close
them should he acquire part-ownership thereof, if there be no stipulation to the contrary.

He can also obstruct them by constructing a building on his land or by raising a wall thereon contiguous to that
having such openings, unless an easement of light has been acquired.

• Art. 670. No windows, apertures, balconies, or other similar projections which afford a direct view upon or towards
an adjoining land or tenement can be made, without leaving a distance of two meters between the wall in which
they are made and such contiguous property.

Neither can side or oblique views upon or towards such conterminous property be had, unless there be a distance of
sixty centimeters.

The nonobservance of these distances does not give rise to prescription.

- NO EASEMENT: No easement is acquired just by observing the distances both for regular windows and
restricted windows. It can be acquired only by title or through prescription. Hence the owner of the adjoining

29
 tenement can block the light and view by constructing his own building or wall. Prescription period will
commence from the time of notarial prohibition because the easement of light and view is a negative easement.

- BAR EXAM ANSWER: Art. 670 provides that non-observance of the distances provided therein does not give
rise to prescription. The distance for direct view is 2 meters, hence, A’s window does not comply with the
requirement. In addition, the easement of light and view is a negative easement. Hence, the prescriptive period
will commence to run only from the time a notarial prohibition is made. The problem does not state that there
was notarial prohibition, hence the prescriptive period did not commence.

• Art. 679. No trees shall be planted near a tenement or piece of land belonging to another except at the distance
authorized by the ordinances or customs of the place, and, in the absence thereof, at a distance of at least two meters
from the dividing line of the estates if tall trees are planted and at a distance of at least fifty centimeters if
shrubs or small trees are planted.

Every landowner shall have the right to demand that trees hereafter planted at a shorter distance from his land or
tenement be uprooted.

The provisions of this article also apply to trees which have grown spontaneously.

• Art. 680. If the branches of any tree should extend over a neighboring estate, tenement, garden or yard, the
owner of the latter shall have the right to demand that they be cut off insofar as they may spread over his property,
and, if it be the roots of a neighboring tree which should penetrate into the land of another, the latter may cut them
off himself within his property.

NUISANCE

• Art. 694. A nuisance is any act, omission, establishment, business, condition of property, or anything else which:

1) Injures or endangers the health or safety of others; or

2) Annoys or offends the senses; or
3) Shocks, defies or disregards decency or morality; or
4) Obstructs or interferes with the free passage of any public highway or street, or any body of water; or
5) Hinders or impairs the use of property. (2005 BAR)

• Art. 695. Nuisance is either public or private. A public nuisance affects a community or neighborhood or any
considerable number of persons, although the extent of the annoyance, danger or damage upon individuals may be
unequal. A private nuisance is one that is not included in the foregoing definition.

• Art. 697. The abatement of a nuisance does not preclude the right of any person injured to recover damages for its
past existence.

- Nuisance Per Se – a nuisance under any and all circumstances because it constitutes a direct menace to public
health or safety, and for that reason, may be abated summarily under undefined law of necessity.

- Nuisance Per accidens – any act, omission, establishment, business, condition of property, or anything else
which is nuisance depends upon certain conditions and circumstance and its existence being a question of fact,
it cannot be abated without due hearing thereon in a tribunal authorized to decide whether such a thing does in
law constitute a nuisance.

- DOCTRINE OF ATTRACTIVE NUISANCE: Under the rule, an owner is liable if he maintains in his
premises dangerous instrumentalities or appliances of a character likely to lure children in play and he fails to
exercise ordinary care to prevent children of tender age from playing therewith or resorting thereto.

§ When not applicable? – not applicable to bodies of water, artificial as well as natural in the absence
of some unusual condition or artificial feature other than the mere water and its location.

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 IV. OBLIGATIONS AND CONTRACTS

OBLIGATIONS

• Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

• Art. 1157. Obligations arise from: ( 1997,1998 BAR)

1) Law;
2) Contracts;
3) Quasi-contracts;
4) Acts or omissions punished by law; and
5) Quasi-delicts.

- 1997 BAR Answer: A promise is not an actionable wrong that allows a party to recover especially when she has
not suffered damages resulting from such promise. A promise does not create an obligation on the part of Juan
because it is not something which arises from a contract of law, quasi contracts or quasi-delicts.

• Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith. (1998,2013 BAR)

NATURE AND EFFECT OF OBLIGATIONS

• Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of
a good father of a family, unless the law or the stipulation of the parties requires another standard of care.

• Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However,
he shall acquire no real right over it until the same has been delivered to him.

• Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him
by article 1170, may compel the debtor to make the delivery. (2015 BAR)

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the
debtor.

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the
same interest, he shall be responsible for any fortuitous event until he has effected the delivery.

- When there is Liability even if there is Fortuitous Event. In an obligation to deliver or to give, the debtor shall
be liable for any loss due to fortuitous event which occurred before delivery in the following instances: § FD

1) The obligor or debtor delays;

2) The obligor or debtor promised to same thing to two or more persons who do not have the same interest
3) When there is stipulation or agreement that the obligor will not be excused even if the cause is fortuitous
event;
4) If there is assumption of risk as required by the nature of obligation;
5) Where the thing to be delivered is generic; and
6) When the obligor is at fault.

- BAR answer: Article 1165 of the New Civil Code provides that if the obligor delays, he shall be responsible
for any fortuitous event until he has effected delivery. Thus, even assuming for the sake of argument that
the theft of the ring can be considered fortuitous event, the jewelry/shop is still liable because there was already
delay when the theft occurred.

• Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. (2015 BAR)

This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be
decreed that what has been poorly done be undone.
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• Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also
be undone at his expense.

• Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

1) When the obligation or the law expressly so declare; or

2) When from the nature and the circumstances of the obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment
of the contract; or
3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in
a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay
by the other begins. (2002 BAR)

- Reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation,
delay by the other begins. (Integrated Packing vs. CA)

• Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages. (1991,2013 BAR)

• Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud
is void.

• Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those events
which could not be foreseen, or which, though foreseen, were inevitable. (2002,2008 BAR)

- Defective brakes, tire blow-outs and others of similar nature cannot be classified as fortuitous events per se
within the meaning of the law. (Tugade vs CA)

- A fortuitous event should occur independent of the will of the debtors or without his participation or
aggravation.

• Presumptions: Art. 1176. The receipt of the principal by the creditor without reservation with respect to the
interest, shall give rise to the presumption that said interest has been paid.

The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the
presumption that such installments have been paid.

• Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may
exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his
person; they may also impugn the acts which the debtor may have done to defraud them.

- Subsidiary Remedies:
1) Subrogatory action or accion subrogatoria – the creditor will file a case in behalf of the debtor with
respect to another obligation that is due to the debtor.
2) Rescissory Action or accion pauliana (Arts. 1177 and 1381(3]) – the creditor will impugn the acts of the
debtor that is in fraud of creditors.

• Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no
stipulation to the contrary.

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 DIFFERENT KINDS OF OBLIGATIONS

KIND CHARACTERISTICS
Suspensive The happening of the condition or event gives rise to the obligation or acquisition of rights.
Resolutory The happening of the condition or event extinguishes obligations / or rights.
Potestative The happening or performance depends upon the will a party.
- If performance depends upon the sole will of the debtor, the obligation is void.
- If the performance depends upon the sole will of the creditor, the obligation
Casual The happening or fulfillment depends on chance or will of a third person.
Mixed Fulfillment depends partly on chance or the will of third person and partly on the will of one party.
Possible By its very nature, it can be fulfilled or it is not against law, public policy or good customs.
Impossible By its nature it cannot be realized or it is against law, good customs or public policy.
Positive Something is to be done)or an act shall be performed
Negative It is required that something will not be done or an act will be omitted.
Divisible It can be partially complied with.
Indivisible It is not susceptible of partial compliance and must always be wholly complied with.
Conjunctive There are two or more conditions that must all be complied with.
Alternative There are two or more conditions but compliance or the happening of one is sufficient,
Express The condition is stated either orally or in writing.
Implied The condition is not stated but is deemed attached.

Pure and Conditional Obligations

• Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a
past event unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects
of the happening of the event. (1999 BAR)

• Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed
to be one with a period, subject to the provisions of article 1197. (1997,2003,2012,2017 BAR BAR)

• Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the condition. (1999 BAR)

• Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take
effect in conformity with the provisions of this Code. (1997,2000,2003 BAR)

- Effects of /Suspensive Potestative Conditions.

1) Will of Obligor. If the fulfillment of the suspensive condition that will give rise to the obligation depends
upon the will of the debtor or obligor the conditional obligation is void. Examples: (i) If Mr. A will
pay when he likes to pay; (ii) If Mr. A will deliver if he decides to sell his specified property.

2) Will of Creditor. If the fulfillment of the suspensive condition depends upon the will of the creditor.
the obligation is valid) Example: If Mr. A will deliver the subject property to Mr. B when Mr. B decides
to make a demand from Mr. A

3) Not Attached on Birth of Obligation. If the suspensive potestative condition is attached not on the
birth of the obligation but on the fulfillment of an obligation that is already existing - valid and the court
must fix the period to comply. Example: Mr. A is indebted to Mr. B, hence, Mr. A is obligated to pay
Mr. B. However, while Mr. A is obliged to pay, he can decide when he wants to pay.

- Effects of Resolutory Potestative Condition.

1) Will of Obligor. If the fulfillment of the resolutory condition depends upon the will of the debtor or
obligor - the obligation is valid. Example: A perfected contract of sale where Mr. B is obligated to deliver
a car to Mr. A (creditor), B has the right to cancel the sale if the manufacturer failed to ship the car to
Mr. B within a certain period.
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 2) Will of Creditor. If the fulfillment of the resolutory condition depends upon the will of the creditor. the
obligation is valid. Example: A perfected contract of sale where Mr. B is obligated to deliver a car to Mr.
A (creditor). Mr. A has the right to cancel the sale if the manufacturer failed to ship the car to Mr. B
within a certain period.

• Article 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law
shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not
affected by the impossible or unlawful condition shall be valid.

The condition not to do an impossible thing shall be considered as not having been agreed upon. (1997,2007 BAR)

• Art. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective
from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. (2003
BAR)

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.

• Constructive fulfillment of suspensive condition: Art. 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.

- Supreme Court ruled to the effect that Art. 1186 on Constructive Fulfillment of obligations applies only to a
suspensive condition and not to a resolutory condition. (IHC v. Joaquin)

• Rights upon fulfillment of suspensive and resolutory conditions: Art. 1187. The effects of a conditional
obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the
obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and
interests during the pendency of the condition shall be deemed to have been mutually compensated. If the
obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and
circumstances of the obligation it should be inferred that the intention of the person constituting the same was
different. (1999 BAR)

In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition
that has been complied with.

• Rules on loss, deterioration and improvement before fulfillment of suspensive condition: Art. 1189. When
the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the
following rules shall be observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:

1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that
the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is
unknown or it cannot be recovered;
3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the
obligation and its fulfillment, with indemnity for damages in either case;
5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;
6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary.

• Rules on loss, deterioration and improvement before fulfillment of resolutory condition: Art. 1190. When the
conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of
said conditions, shall return to each other what they have received.

In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are
laid down in the preceding article shall be applied to the party who is bound to return.

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 As for the obligations to do and not to do, the provisions of the second paragraph of article 1187 shall be observed
as regards the effect of the extinguishment of the obligation.

• Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with articles 1385 and 1388 and the Mortgage Law. (2005,2008,2013 BAR)

Obligations with a Period

• Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in
article 1189 shall be observed.

• Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or
believing that the obligation has become due and demandable, may be recovered, with the fruits and interests.

• Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit
of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that
the period has been established in favor of one or of the other.

• Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (1991,1997,2003,
2012,2017 BAR BAR)

• Art. 1198. The debtor shall lose every right to make use of the period: (IF2IVA)

1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for
the debt;
2) When he does not furnish to the creditor the guaranties or securities which he has promised; (2013 BAR)
3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through
a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;
4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
5) When the debtor attempts to abscond.

Alternative Obligations

• Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative
from the day when the selection has been communicated to the debtor.

Until then the responsibility of the debtor shall be governed by the following rules:

1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which
the creditor should choose from among the remainder, or that which remains if only one subsists;
2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to
damages;
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 3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of
any one of them, also with indemnity for damages.

The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should
become impossible.

• Art. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution,
the obligation is called facultative.

The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render
him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of
his delay, negligence or fraud.

- DISTINCTIONS BETWEEN ALTERNATIVE AND FACULTATIVE OBLIGATIONS.

ALTERNATIVE FACULTATIVE

ALTERNATIVE
There are two or more prestation that are due.
The debtor can choose any of the alternatives
The debtor in certain cases may be liable for damages
if the choice is with the creditor and loss of any
alternative is due to the debtor's fault.
FACULTATIVE
There is only one prestation that is due
The debtor has only one choice, but with a right to
substitute.
Loss of the substitute due to the debtor's fault will not
make the debtor liable.

The choice is generally with the debtor but it can be The option to substitute is always with the debtor.
given to the creditor and a third person

Joint and Solidary Obligations

- Solidary Obligation – one in which each of the debtors is liable for the entire obligation and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors.

- Joint obligation – one in which debtor is liable only for proportionate part of the debt and the creditor is
entitle to demand only a proportionate part of the credit from each debtor.

• Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity. (2001,2008,2015,2017 BAR)

- The obligation is solidary if it is stipulated that: (1) the liability is "joint and several," (2) obligation in solidum,
(3) persons are liable "together or separately," we and (4) persons are liable "individually or collectively."

- Requisites of Solidary Obligations.

1) Plurality of subjects two or more creditors and / or two or more debtors;
2) Unity of Prestation - the shares of each creditor or debtor is not determined.

• Presumption: Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding
article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many shares
as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits. (2015 BAR)

- the presumption is that the obligation is joint except Art. 1207.

• Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts,
and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent,
the others shall not be liable for his share.

- Effects of Joint Indivisible obligation:

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 1) Act of one joint creditor does not prejudice all and the collective acts of all is required.
2) The creditor must demand performance only against all joint debtors. Demand to one is not effective for
all joint debtors
3) Insolvency of one debtor will not affect the others.
4) Non-compliance by one debtor will convert the obligation into one for damages or monetary obligation.

• Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner
and by the same periods and conditions.

• Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which
may be prejudicial to the latter.

- RULES ON ACTIVE SOLIDARITY (solidarity among creditors):

1. Relationship between solidary creditors and debtors

a) One solidary creditor may ask for full payment or full compliance with the obligation
b) Under Art. 1214, the moment a demand is made is made by one solidary creditor, payment must be
paid to him
c) Under Art. 1215, any one of the solidary creditors may extinguish the obligation

2. Relationship among creditors

a) If the solidary creditor was able to recover from the debtor, he must thereafter give the share of the
other creditors;
b) Under Art. 1212, solidary creditors may do whatever may be useful to others;
c) Likewise under Art. 1212 and the second paragraph of Art. 1215, solidary creditors may not do
anything that is prejudicial to the other creditors. (Ex: One of the solidary creditors may condone or remit the
entire obligation. However, he is liable to the other solidary creditors who did not consent to the condonation of their
share in the credit)
d) Under Art. 1213, a solidary creditor must get the consent of the other creditors before assigning or
transferring his right or share in the credit.
e) Novation may result in prejudice or benefit to the solidary creditors.
f) Compensation takes place when two persons are creditors and debtors of each other and the
respective obligations are extinguished up to extent that they coincide.

- RULES ON PASSIVE SOLIDARITY (solidarity among debtors):

1. Relationship between creditor and solidary debtors

a) one solidary debtor may be obliged to perform the entire obligation
b) Even if the demand is made in one solidary debtor, demand can be made on the others so long as
there is no full compliance
c) Under Art. 1222, a solidary debtor may raise defenses against the creditor
d) Payment by one solidary debtor extinguishes the obligation
e) If the thing which is the object of the obligation disappears or the prestation becomes impossible –
due to the fault of one or all of the solidary debtors, each solidary co-debtor shall be liable for the
value of the obligation and damages.
f) If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

2. Relationship among solidary debtors

a) If one of the solidary debtors paid the creditor, he can claim reimbursement from the other debtors
b) A solidary debtor is also entitled to interest if he paid on due date
c) If one of the solidary debtors is insolvent, the share of the insolvent debtor shall be borne by the
other debtors
d) A solidary debtor is entitled to reimbursement if he paid the obligation after the obligation has
prescribed or after it has become illegal;

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 e) A solidary debtor who paid the entire debt may claim reimbursement even against a debtor whose
share was remitted by the creditor.

• Art. 1213. A solidary creditor cannot assign his rights without the consent of the others.

• Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or
with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of article 1219.

The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the
others for the share in the obligation corresponding to them.

• Against whom the creditor may proceed in solidary obligation: Art. 1216. The creditor may proceed against
any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not
been fully collected. (1992,1997 BAR)

• Effect of payment of solidary debtor: Art. 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the
interest for the payment already made. If the payment is made before the debt is due, no interest for the
intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (Principle of mutual
guaranty among solidary debtors) (1998,2003,2013,2017 BAR)

• Effect of remission made in favor of one of the Solidary debtor: Art. 1219. The remission made by the creditor
of the share which affects one of the solidary debtors does not release the latter from his responsibility towards
the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected.

• Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to
reimbursement from his co-debtors. (2015 BAR)

• Defenses available to a Solidary Debtor: Art. 1222. A solidary debtor may, in actions filed by the creditor, avail
himself of all defenses which are derived from the nature of the obligation and of those which are personal to
him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself
thereof only as regards that part of the debt for which the latter are responsible. (2003 BAR)

- 2003 Bar answer: A may not interpose the defense of insolvency of D as defense. Applying the principle of
mutual guaranty among solidary debtors, A guaranteed the payment of D’s share and of all the other co-debtors.

Obligations with a Penal Clause

• Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment
of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid
if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

EXTINGUISHMENT OF OBLIGATIONS

• Art. 1231. Obligations are extinguished:

1) By payment or performance:
2) By the loss of the thing due:
3) By the condonation or remission of the debt;
4) By the confusion or merger of the rights of creditor and debtor;
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 5) By compensation;
6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition,
and prescription, are governed elsewhere in this Code.

- Obligations may be extinguished also by the following:

1) By death whenever personal obligations are involved;

2) By expiration of a resolutory condition
3) By compromise
4) By impossibility of performance; and
5) By fortuitous event.

Payment or Performance

• Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an
obligation. (1998,2009 BAR)

• Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the case may be. (1998 BAR)

• Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though
there had been a strict and complete fulfillment, less damages suffered by the obligee.

• Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with.

- Articles 1233, 1234 and 1235 deals with the integrity of payment. Also, Articles 1234 and 1235 are exceptions
when complete performance is not required, substantial compliance only.

• Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest
in the fulfillment of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor.

• Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty.

- Effects of payment of third person

1) Right of third person if payment is with the knowledge and consent of the debtor
a) The right of reimbursement
b) Right of subrogation

2) Right of third person if payment is without the knowledge and consent of the debtor
a) The right of reimbursement
b) There is no right of subrogation

• Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.

• Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the
thing delivered, or insofar as the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such
benefit to the creditor need not be proved in the following cases: (RAL/LAR)
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 1) If after the payment, the third person acquires the creditor's rights;
2) If the creditor ratifies the payment to the third person;
3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive
the payment.

- Payment to an incapacitated person is generally not effective. An exception is Art. 1241. Thus, payment to a
minor is not effective. However, if the obligation is to deliver a house and the minor kept or used the used after
delivery, then the payment is valid.

• Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor.

• Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall
be governed by the law of sales. (2003,2009 BAR)

- Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor
to the creditor as an equivalent of the performance of the obligation. It partakes the nature of a contract of
sale, where the thing offered by the debtor is the object of the contract, while the debt is the consideration or
purchase price. (Typingco v. Lim, 2009)

- Requisites of Dation in payment:

1) instead of the original prestation, another prestation is performed
2) the original prestation that is due and the one performed are different
3) the parties agreed that the performance of the different prestation extinguishes the obligation.

• Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the
debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into
consideration.

• Indivisibility of payment/performance: Art. 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor
be required to make partial payments. (2013 BAR)

Exception: However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and
the debtor may effect the payment of the former without waiting for the liquidation of the latter.

- Example: The obligation of Mr. A is to deliver 1,000 pesos plus damages. There is a liquidated portion because
the amount to be delivered P1,000 is fixed. However, the damages that must be paid is unliquidated because it
is still undetermined.

• Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed, or when through the fault of the creditor they have
been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. (2008,2013 BAR)

- Commercial papers: Delivery of any commercial paper (bills of exchange like checks and PN) whether they
are negotiable instruments or not does not produce the effect of payment. Exceptions: 1) it have been encashed;
and 2) impaired due to the fault of the creditor.

• Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of
the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an
agreement to the contrary. (2001 BAR)

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 - It exists when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual
or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have
been reasonably foreseen or manifestly beyond the contemplation of the parties at the time of the establishment
of the obligation.

- An extraordinary inflation or deflation cannot be assumed. There must be a declaration from the appropriate
government agency like the BSP or DoF.

- Extraordinary cannot be established by the mere fact that there was devaluation of the peso.

• Art. 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation was constituted.

In any other case the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne
by him.

These provisions are without prejudice to venue under the Rules of Court.

Application of Payments

- Requisites of application of payments:

1) there are two or more debts;

2) the debtor and the creditor in such obligations are the same;
3) the obligations must be of the same kind;
4) the obligations are all due and demandable; and
5) the payment made is not sufficient to pay all obligations.

• Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the
time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when
the application of payment is made by the party for whose benefit the term has been constituted, application shall
not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the contract.

- If there is no designated debt in accordance with the above stated rules application shall be deemed made by
operation of law as follows:

1) payment shall be applied to the interest first before application to the principal.
2) Payment shall be applied to: 1st: the debt that is most onerous; 2nd: if debts are of the same terms and
conditions and burden (one is not more onerous than others) payment shall be applied in proportion to
the debt.

• Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until
the interests have been covered.

Payment by Cession

- it is the process by which the debtor transfer all the properties not subject to execution in favor of his creditors
so that the latter may sell them and thus apply the proceeds to their credits.

• Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession,
unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of

41
 the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his
creditors shall be governed by special laws.

- Distinguished from Dation in Payment

Dation in payment Assignment

Ownership of the thing delivered is transferred to the The creditors do not acquire ownership but must sell the
creditor thing and apply the proceeds of the sale
The debt is extinguished The debts are extinguished only up to the extent covered
by the proceeds of the sale.
There is only one creditor There are two or more creditors
Insolvency of the debtor is not required Insolvency of the debtor is required

Tender of Payment and Consignation

- Tender of payment – it is the definitive act of offering the creditor what is due him or her, together with the
demand that the creditor accept the same.

- Consignation – it is the deposit in court by the debtor does not want to or cannot receive the same. It is the act
of depositing the thing due with the court or judicial authority whenever the creditor cannot accept or refuses
to accept payment.

• Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the
debtor shall be released from responsibility by the consignation of the thing or sum due.

Consignation alone shall produce the same effect in the following cases: (TRIAL)

1) When the creditor is absent or unknown, or does not appear at the place of payment;
2) When he is incapacitated to receive the payment at the time it is due;
3) When, without just cause, he refuses to give a receipt;
4) When two or more persons claim the same right to collect;
5) When the title of the obligation has been lost.

• Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the
persons interested in the fulfillment of the obligation. (2014 BAR)

The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate
payment.

• Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before
whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other
cases.

The consignation having been made, the interested parties shall also be notified thereof.

- Requisites of valid consignation:

1) The debt must be due

2) The consignation of the obligation had been made because the creditor to whom tender of payment was
made refused to accept without just cause. (there is no valid consignation if the creditor refused to
accept the tender of payment for a valid reason)
3) Previous notice of the consignation had been given to the person interested in the performance of
the obligation
4) The amount due was placed at the disposal of the court; and
5) After the consignation had been made the person interested must be notified thereof.

- In consignation, prior tender of payment is indispensable.

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• Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor.

• Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of
the obligation.

Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been
properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in
force.

• Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same,
he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall
be released.

Loss of the Thing Due

• Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should
be lost or destroyed without the fault of the debtor, and before he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish
the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation
requires the assumption of risk. (1994 BAR)

• Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.

- genus never perishes

• Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor.

- Legal or physical impossibility of the performance of the work or service is equivalent to loss of the object and
the obligation is therefore extinguished. This includes obligations to perform particular work or service. (PNC
vs. CA, 1997)

• Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in part. (1993 BAR)

- Rebus sic stantibus – the parties stipulate that when the service has become so difficult as to be manifestly
beyond the contemplation, total or partial release from a prestation and from counter-prestation is allowed.

Condonation or Remission of the Debt

• Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may
be made expressly or impliedly.

One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation. (GADE) (2000 BAR)

• Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor,
implies the renunciation of the action which the former had against the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by
proving that the delivery of the document was made in virtue of payment of the debt.

• Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after
its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing.

Compensation
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 - Compensation is a mode of extinguishing to the concurrent amount of the obligations of persons who in their
own right and as principals are reciprocally debtors and creditors of each other.

• Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other. (1998 BAR)

• Art. 1279. In order that compensation may be proper, it is necessary: (P-DSLR) (1998,2002,2008,2009 BAR)

1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
3) That the two debts be due;
4) That they be liquidated and demandable;
5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

- the effect of compensation, when all the requisites are present, is automatic and no further act is necessary.
- the term consumable should be understand to mean that “fungible”. In other words, even if the thing is not
consumable, there can be compensation so long as the thing can be replaced with the same unit of the same
kind.

- As a GR, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on
the part of the depositor. (Gullas vs. PNB)

• Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as
regards what the creditor may owe the principal debtor.

• Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places,
but there shall be an indemnity for expenses of exchange or transportation to the place of payment.

• Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations
of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of article 301. (1998 BAR)

- Compensation cannot take effect under the above provisions in the following instances:

1) When one of the debts arises from a deposit or from the obligations of a depositary
2) When one of the debts arises from the obligations of a bailee in commodatum
3) When one involves a claim for support by gratuitous title
4) When one of the debts arises because of civil liability arising from criminal liability.

• Art. 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of
law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of
the compensation.

- Example: Mr. A borrowed P100,000 from Mr. B payable on June 10, 2013. Mr. Big also obligated to pay Mr.
A P100,000 on June 2, 2013. On June 15, 2013, Mr. B transferred his right to collect P100,000 (from Mr. A)
to Mr. C. This assignment to Mr. C is not effective if all the requirements for compensation are present on
June 10, 2005 because on said date, the obligation to Mr. B is extinguished. Mr. C cannot collect from Mr. A

- Exceptions: If the debtor CONSENTS. In the previous example, the transfer to Mr. C is effective if Mr. A
consents. Therefore, the liability of Mr. A remains effective and Mr. C can collect from him.

Novation
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 - Novation is the extinguishment of an obligation by a subsequent one which terminates it, either by changing its
object or principal conditions, by Substituting a new debtor in place of an old one, or by subrogating a third
person to the rights of the creditor. Novation has dual functions: (1) to extinguish an existing obligation, and
(2) to substitute a new 'one in its place.

- Requisites: For novation to take place, the following requisites must concur: (2016 BAR)
1) there must be previous valid obligation
2) there must be an agreement of the parties concerned to a new contract
3) there must be extinguishment of the old contract/obligation; and
4) there must be valid new contract/obligation.
5) there must be intention to novate; and
6) old and new obligation should be incompatible.

- Animus Novandi – novation is never presumed and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unmistakable. (PNB v. Soriano
2012)

• Art. 1291. Obligations may be modified by:

1) Changing their object or principal conditions;

2) Substituting the person of the debtor;
3) Subrogating a third person in the rights of the creditor.

• Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that
it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other. (1994,2008,2014 BAR)

- How to determine if there is extinguishment: There are two ways to determine if the new obligation
extinguishes the new obligation:

1) Explicit declaration – if it is unequivocally stated in the new agreement that the old obligation is
extinguished. Novation is never presumed; and
2) Material incompatibility – if the old and new obligations are incompatible with each other on every point.
(Molino vs. Security Diners, 2001)

- When not expressed, incompatibility is required so as to ensure that the parties intended such novation despite
their failure to express it in categorical terms. (Ligutan vs. CA, 2002)

- Test to be applied in case of material incompatibility: Can the old obligation stand despite the new obligations?
if the old obligation cannot be maintained then there is extinctive novation.

• Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made
even without the knowledge or against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237. (1996,2001,2014 BAR)

- Expromission: the initiative for change does not come from – and may even be made without the knowledge
of – the debtor since it consists of a third person’s assumption of obligation;

- Delegacion: the debtor offers, and the creditor accepts, a third person who consents to the substitution and
assumes the obligation. The consent of these three person are necessary.

- Distinguish Expromission and Delegacion:

Expromission Delegacion
The initiative does not come from the debtor The initiative comes from the debtor
Consent of the debtor is not present and not even necessary Consent of the debtor, the creditor, the third person are
present
The debtor is released The debtor is released

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 Insolvency of the new debtor before or after the novation Insolvency of the new debtor REVIVES the obligation fo
does not revive the obligation of the debtor. the debtor if: a) insolvency is anterior – existing at the time
of novation; and b) of public knowledge or known to the
debtor

• Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's
insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original
debtor.

• Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the
creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already
existing and of public knowledge, or known to the debtor, when the delegated his debt.

• Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third persons who did not give their consent. (1994 BAR)

• Art. 1302. It is presumed that there is legal subrogation:

1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to the latter's share.

- Subrogation – it is transfer if all the rights of the creditor to a third person. Thus, this involves novation by
changing the creditor.

• Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either
against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation.

• Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall
be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit.

CONTRACTS

• Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.

• Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
(1996,2004 BAR)

• Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and
II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place.
(2003 BAR)

• Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them. (1994,2001,2004,2008 BAR)

- Any change in the contract must be mutually agreed upon, otherwise, it is bereft of any binding effect.

• Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights
and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision
of law. The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided
he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a
46
 person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third
person. (1996, 2002 BAR)

- GR: A contract is only valid between the parties, their assigns and the heirs. Exception:

1) Stipulation pour atrui;

2) When a third person induces a party to violate contract
3) Third persons who come into possession of the object of the contract creating real rights (Negotiorium
gestio)
4) Contracts entered into in fraud of creditors

- 2002 BAR Answer: A civil law principle or relativity of contracts which provides that contracts can only bind
the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such
contract and has acted with knowledge thereof. (Integrated Packing vs. CA, 2000)

• Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other
contracting party. (1991,1998 BAR)

• Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law. (1998,2005 BAR)

- Perfection signifies the birth of the contract, that is, when all essential requisites of a contract concur. As to
how contracts are perfected, they may be classified into: (1) consensual contracts, (2) real contracts, or (3)
formal contracts.
1) Consensual contracts - perfected by mere consent or upon the meeting of minds upon the object and
consideration of the contract. Example: Contract of Sale.
2) Real contracts - perfected only upon delivery. Example: Loan, deposit, pledge or commodatum.
3) Formal (or solemn) contracts – perfected only upon execution or preparation of certain documents or
other formalities. Examples: (1) Donation of real property which must be in a public instrument, (2)
Agency to sell real property which must be in writing.

• Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the
object of the obligation. (1998 BAR)

• Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by
law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other contracting party.

ESSENTIAL REQUISITES OF CONTRACTS

• Art. 1318. There is no contract unless the following requisites concur: (2005 BAR)

1) Consent of the contracting parties;

2) Object certain which is the subject matter of the contract;
3) Cause of the obligation which is established.

Consent

• Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counter-offer.

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 Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge.
The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1996,2005
BAR)

• Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either
party before acceptance is conveyed.

• Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any
time before acceptance by communicating such withdrawal, except when the option is founded upon a
consideration, as something paid or promised. (1996,1999,2005,2013 BAR)

• Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound
to accept the highest or lowest bidder, unless the contrary appears.

• Art. 1327. The following cannot give consent to a contract: (1990 BAR)
1) Unemancipated minors;
2) Insane or demented persons, and deaf-mutes who do not know how to write.

• Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.

There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of
an imminent and grave evil upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.

To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.

A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.

• Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.

Object of Contracts

• Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of
a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise be
the object of a contract.

Cause of Contracts

• Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful
if it is contrary to law, morals, good customs, public order or public policy.

- Cause or consideration is the reason that impels a party to assume an obligation under a contract.

FORM OF CONTRACTS

• Art. 1356.Contracts shall be obligatory, in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. However, when the law requires that a contract be in some form
in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute
and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised.

• Remedy: Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in
the following article, the contracting parties may compel each other to observe that form, once the contract has
been perfected. This right may be exercised simultaneously with the action upon the contract. (2006 BAR)
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• Formalities to bind third persons: Art. 1358. The following must appear in a public document: (2013 BAR)

1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment
of real rights over immovable property; sales of real property or of an interest therein a governed by articles
1403, No. 2, and 1405;
2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of
gains;
3) The power to administer property, or any other power which has for its object an act appearing or which
should appear in a public document, or should prejudice a third person;
4) The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a
private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and 1405.

- Formalities for the validity of the contract:

CONTRACT FORMALITY REQUIRED

Donation of Real Property (Art. 749) Public instrument
Donation of personal property exceeding P5000 (Art. 748) Must be in writing
Stipulation that interest should be paid in loans (Art. 1956) Must be in writing
Agency to sell land (Art. 1874) Must be in writing
Partnership where real property is contributed (Art. 1773) A signed inventory must be attached to the public
instrument that evidences the partnership
contract.
An agreement limiting the diligence of common carriers over Must be in writing
goods to less than extraordinary diligence (Art. 1744)
Contract of Antichresis (Art. 2134) The principal amount and the interest to be paid
must be in writing.

REFORMATION OF INSTRUMENTS

• Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable
conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment of the contract.

- The action for reformation of the instrument must be filed within ten years from the execution of the contract.

Defective contracts

Rescissible Voidable Unenforceable Void

What is the defect 1) Lesion, or 2) 1) Incapacity or 2) 1) In excess or without 1) absence of
Transfer in fraud if consent is vitiated by authority, 2) Violation requisites or 2) illicit
creditors, or 3) Fraud, violence, of statute of frauds, 3) nature
Transfer by insolvent intimidation, undue incapacity of both
before due date influence parties
What is the effect? Binding and Valid and binding Cannot be enforced No effect is produced
enforceable unless until annulled unless ratified or waived
rescinded
Can it be ratified? Cannot be ratified Can be ratified Can be ratified Cannot be ratified
Who can assail the Contracting party and Contracting parties Contracting parties only Contracting parties
contract? third person whose only and third person
interest are prejudiced whose interest are
affected
Prescriptive 4 years 4 years No prescriptive period Action for declaration
period of filing is provided for because that the contract is
the case the same is not void is imprescriptible
applicable. Prescription
cannot cure the defect
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 How the contract Directly Directly or collaterally Directly or collaterally Directly or collaterally
be assailed,
directly or
collaterally?

RESCISSIBLE CONTRACTS

- are those essential requisites of a contracts are those where essential requisites of a contracts are those where
essential requisites of a contract exist and the contract should have been valid but by reason of injury or damage
to third persons, such as creditors, the contract may be rescinded. Rescission of this type of contract is a matter
of equity.

- It should be emphasized that rescission of rescissible contract under Arts. 1381 to 1389 is different from
rescission that is allowed under Art. 1191. Rescission under Art. 1191 is also called “resolution”. The ground
for rescission under Art. 1191 of the NCC is not defect in the contract but non-compliance of a binding and
enforceable contract.

• Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1998 BAR)

• Art. 1381. The following contracts are rescissible: (GAFLO)

1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more
than one-fourth of the value of the things which are the object thereof;
2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
5) All other contracts specially declared by law to be subject to rescission.

- par. 3 – the action to rescind contract for being fraud of creditor is called accion pauliana.

- The GR is that rescission of a contract will not be permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very object of the parties in making the agreement.
(Zepeda v. CA, 1992)

• Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.

• Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the possession
of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

- Mutual restitution – mutual restitution is required in rescission. The person who rescinded the contract must
be able to return what he received and the losing party must be able to restore what he received.

• Badges of fraud: Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to
pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment
has been issued. The decision or attachment need not refer to the property alienated, and need not have been
obtained by the party seeking the rescission.

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 In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized
by the law of evidence.

- The Supreme Court ruled that the following may be considered badges of fraud:

1) The fact that the consideration of the conveyance is fictitious or is inadequate;

2) A transfer made by a debtor after suit has begun and while it is pending against him;
3) The failure of the vendee to take exclusive possession of all the property.

VOIDABLE CONTRACTS

- These are contracts that are valid until annulled.

• Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the
contracting parties: (2004,2015 BAR)

1) Those where one of the parties is incapable of giving consent to a contract;

2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of
ratification.

- Voidable due incapacity: Consent is an indispensable element. However, even if there is consent, there is no
effective consent in law without the capacity to give such consent. Legal consent presupposes capacity. (Felix
Gochan vs. Heirs of Baba, 2003)

- Mistake may invalidate consent only if it refers to the substance of the thing which is the object of the contract,
or to those conditions which have principally moved one or both parties to enter into the contract. Thus,
mistake may involve wrong conception of the thing and a belief in the existence of some circumstances, fact or
event which in reality do not exist.

- Violence – it refers to a degree of physical constraint or danger actually inflicted upon a person.

- Intimidation – it is the exertion of moral force or compulsion; the danger or constraint is threatened or
impending.

- Undue influence – refers to any means employed upon a party which under the circumstances, he could not
well resist, and which, under the circumstances, he could well resist, and which controlled his volition and
induced him to give his consent to the contract, which otherwise he would not have entered into.

- Fraud – is employment of insidious words or machinations of one of the contracting parties to induce the other
to enter into a contracting parties to induce the other to enter into a contract which, without them, he would
not have agreed to.

• Art. 1391. The action for annulment shall be brought within four years.

This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the
consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the
guardianship ceases. (1990,2015 BAR)

• Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted.

- Requisites of ratification:

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 1) The act done by the person who has the right to invoke the voidable nature of the contract – he who
suffers incapacity or the person against whom the vice was exerted;
2) The act that constitutes ratification was done with knowledge of the vice; and
3) The incapacity or vice has ceased.

• Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally
or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted;
nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base
their action upon these flaws of the contract. (1996 BAR)

- 1996 Bar answer: Only the aggrieved party to the contract may bring the action for annulment thereof.

• Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person
is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

UNENFORCEABLE CONTRACTS

- are those that cannot be sued upon or enforced unless they are ratified.

• Art. 1403. The following contracts are unenforceable, unless they are ratified: (2009,2013,2017 BAR)

1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;

2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement
cannot be received without the writing, or a secondary evidence of its contents:

a) An agreement that by its terms is not to be performed within a year from the making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or
some of them, of such things in action or pay at the time some part of the purchase money; but when
a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of
the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose
account the sale is made, it is a sufficient memorandum;
e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of
an interest therein;
f) A representation as to the credit of a third person.

3) Those where both parties are incapable of giving consent to a contract.

- Kinds of unenforceable contracts:

a) Unenforceable due to absence of authority

b) Unenforceable due to violation of Statute of Frauds
c) Unenforceable due to incapacity of both parties

- It is well settled that the Statute of frauds is applicable only to executory contracts. it is important to note that
the application of statute of frauds presupposes the existence of a perfected contract. The same is not applicable
if there is no perfected contract.

- The statute of frauds is NOT applicable if the contract is wholly or partially executed. If the contract is partially
performed, the Statute of Fraud is no longer applicable. Example: The contract of sale is a pair of shoes worth
P2,000.00. The shoes were already delivered but the price is unpaid. The contract is already enforceable and the
seller can enforce the contract by demanding for payment of the price.

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 - Formality required: Art. 1403(2) requires the contracts enumerated therein to be in some note or memorandum
in writing and subscribed by the party charged or by his agent.

• Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by the failure
to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.

• Article 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the
parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if
only one of them were incapacitated. (2017 BAR)

If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall
be validated from the inception.

VOID AND INEXISTENT CONTRACTS

• Art. 1409. The following contracts are inexistent and void from the beginning: (C2ESIAP) (1991,2004 BAR)

1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;
2) Those which are absolutely simulated or fictitious;
3) Those whose cause or object did not exist at the time of the transaction;
4) Those whose object is outside the commerce of men;
5) Those which contemplate an impossible service;
6) Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;
7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

- Prohibited or void by law:

1) Art. 1490 – Sale between spouse

2) Art. 96 FC – Any alienation or encumbrance made by the husband of the conjugal partnership property
without the consent of the wife is void.
3) Art. 1347 – Contracts involving future inheritance
4) Art. 1874 – This is an example of case when the law declares a contract void if certain formalities are not
complied with. Thus, in sale of real property through an agent, the authority of the agent must be in writing
otherwise the sale is void.

- Supreme Court has ruled that the sale of conjugal property is void if both spouses have not given their written
consent to it and even if the spouse who did not sign the Deed of Sale participated in the negotiation of the
contract. (Abalos vs. Macatangay, 2004)

• Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. (1999 BAR)

• Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes
a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has
given, and shall not be bound to comply with his promise.

- The in pari delicto rule does not apply to absolutely simulated contracts. The doctrine can be applied if there is
an object or consideration but said consideration or object is illegal.

• Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed:
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 1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of
the contract, or demand the performance of the other's undertaking;

2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the
contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand
the return of what he has given without any obligation to comply his promise.

• Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with
interest thereon from the date of the payment.

• Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is
designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid
or delivered. (1991 BAR)

• Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter
may be enforced.

NATURAL OBLIGATIONS

• Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance.
Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action
to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what
has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles.
(2004,2015 BAR)

• Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who
voluntarily performs the contract cannot recover what he has delivered or the value of the service he has
rendered.

• Art. 1425. When without the knowledge or against the will of the debtor, a third person pays a debt which the
obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover what he has paid.

V. LOANS & MORTGAGES

LOAN

• Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in which case the contract is called a commodatum;
or money or other consumable thing, upon the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to
the borrower. (1993,2004,2005 BAR)

- Real Contract: loan is a real contract because commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.

• Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon
parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the
contract. (2013 BAR)

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 COMMODATUM

• Art. 1935. The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1998 BAR)

• Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition. (1998 BAR)

• Art. 1937. Movable or immovable property may be the object of commodatum. (1998 BAR)

• Art. 1938. The bailor in commodatum need not be the owner of the thing loaned. (1998 BAR)

• Art. 1939. Commodatum is purely personal in character. Consequently: (2006,2007 BAR)

1) The death of either the bailor or the bailee extinguishes the contract;
2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of
the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or
unless the nature of the thing forbids such use.

• Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid.

Obligations of the Bailee

• Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned.
(2005,2013 BAR)

• Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (LACKeD)

1) If he devotes the thing to any purpose different from that for which it has been loaned;
2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the
commodatum has been constituted;
3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the
bailee from responsibility in case of a fortuitous event;
4) If he lends or leases the thing to a third person, who is not a member of his household;
5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1993,2013 BAR)

• Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even
though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in article
1951.

Obligations of the Bailor

• Art. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period
stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However,
if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. (2005
BAR)

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession
of the bailor.

- As a GR, the bailor cannot demand the return of the thing loaned. Exceptions are:

1) Urgent need of the bailor

2) Precarium – the bailor may demand the thing at will, and the contractual relation is called a precarium in
the following cases: i) if neither the duration of the contract nor the use to which the thing loaned should
be devoted, has been stipulated; or ii) if the use of the thing is merely tolerated by the owner.
3) The bailor commits any acts of ingratitude under Art. 765
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• Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the
following cases:

1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been
stipulated; or
2) If the use of the thing is merely tolerated by the owner.

• Art. 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing
loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when
they are so urgent that the reply to the notification cannot be awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though
he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation
to the contrary. (2005 BAR)

- Expenses:

Type of expenses Who is liable

Ordinary expenses for the uses and preservation of the
thing loaned
Extraordinary expenses for preservation
Extraordinary expenses arising on the occasion of the actual
use of the thing by the bailee (even without the bailee’s
fault)
Bailee-borrower
Bailor-lender
Note: Bailee may pay with prior notice to the Bailor and
subject to the reimbursement of the latter
Equally by the bailor and the bailee

• Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the
thing to the bailee.

- Right of retention: the bailee cannot retain the thing loaned on the ground that the bailor owes him something,
even though it may be by reason of expenses. However, the bailee has a right of retention for damages
mentioned in Art. 1951. Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise
the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof.

SIMPLE LOAN OR MUTUUM

• Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and quality. (1996,2004 BAR)

• Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. (2004,2012 BAR)

• Art. 1959. Without prejudice to the provisions of article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal,
shall earn new interest.

- 2004 BAR: A party cannot unilateral increase the rate if interest. Any stipulation that allows one of the parties
to unilaterally increase the interest rate is not valid. The unilateral increase violates the rule on mutuality of
contract.
- As a GR, interest due shall not and unpaid shall not ear interest, except: i) upon judicial demand; and ii) upon
compounding interest is agreed upon.

• Art. 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code
concerning solutio indebiti, or natural obligations, shall be applied, as the case may be.

RECTO LAW & MACEDA LAW

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• RECTO LAW: Art. 1484. In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise any of the following remedies: (1999,2000 BAR)

1) Exact fulfillment of the obligation, should the vendee fail to pay;

2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure
to pay cover two or more installments. In this case, he shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the contrary shall be void.

• Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with
option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.

• Art. 1486. In the case referred to in two preceding articles, a stipulation that the installments or rents paid shall not
be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the
circumstances.

- Statute of Frauds: A sale is covered by the statute of frauds (or should be in writing) if:
1) Public or private instrument – if the terms of the sale is not to be performed withing a year;
2) Public instrument – if the sale involves real property; and
3) private or public instrument – in sale of goods exceeding P500.00

- Exception: Sale of large cattle must be in writing otherwise it is void (Art. 1581)

1) RECTO LAW – Art. 1484

- When applicable: Sale of personal property in INSTALLMENT. The Recto law does NOT apply
to a straight sale (one time payment) or a sale that is partly cash and partly term (meaning there will
be initial payment with the balance all payable once in the future).

- In Substance Sale on Installment. The law applies to contracts that are in substance sale of
personal property in installment. Thus, it applies "'financial lease" or "financial leasing, " where a
financing company would, in effect, initially purchase a mobile equipment and turn around to lease
it to a client who gets, in addition, an option to purchase the property at the expiry of the lease
period. The Recto law applies where supposed lessee will retain the thing if he fully paid the
obligation.

2) MACEDA LAW (R.A. No. 6552). The Maceda law applies to contracts of sale of real estate on installment
payments, including residential condominium apartments. It covers Contracts to Sell.

a) Excluded Sale: The Maceda law does not apply to (1) Sale of industrial lots, (2) Sale of commercial
buildings, and (3) Sales to Agricultural Tenants, (4) Straight sale or Sale not on installment basis.

b) Who cannot Invoke Maceda Law. The law cannot be invoked by the following persons: (1) The
highest bidder in the foreclosure sale - if the seller opted to foreclose the mortgage; (2) The developer-
seller or his successor (the person who steps into the shoes of the seller by buying the project from
the developer).

- Rule if the Buyer has Paid at Least Two (2) Years Installment.

1) Grace Period. The buyer earns a grace period to pay which is fixed at the rate of one month
for every one year of installment payment. In case the buyer defaults in the payment of
succeeding installments, the buyer can pay the unpaid installment without interest during this
grace period. Limitation. This right shall be exercised by the buyer only once in every five years
of the life of the contract and its extensions, if any.

2) Requirements of Cancellation. The seller can cancel the sale if the buyer still failed to pay
within the grace period. The following must be complied with if the seller will cancel if the
buyer failed to pay:

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 i. The seller should give a notarized notice of cancellation or the demand for rescission
of the contract by a notarial act;
ii. There must be full payment of the cash surrender value, if any, to the buyer.

3) Amount of Cash Surrender Value. The seller shall refund to the buyer the cash surrender value
of the payments on the property equivalent to (i) Fifty percent (50%) of the total payments
made plus, (ii) after five years of installments, an additional five percent (5%) every year.
Limitations. (i) The total cash surrender value must not to exceed ninety percent (90%)of
the total payments made; and (ii) Down payments, deposits or options on the contract shall
be included in the computation of the total number of installment payments made.

- Rule if the Buyer has Paid Less than Two (2) Years Installment.

1) Grace Period. The Buyer may pay within 60 days from the date the installment became due.
2) Cancellation. In case of non-payment within the 60-day grace period, the seller may cancel
the sale after 30 days from receipt of the buyer of the notice of cancellation or demand for
rescission.

PERSONAL PROPERTY SECURITY ACT (RA 11057)

- This Act shall apply to all transactions of any form that secure an obligation with movable collateral, except
interest in aircrafts subject to RA 9497, and interests in ships subject to PD 1521.

1. Definitions and Scope

2. Asset-specific rules
3. Perfection of security interests
4. Registration
5. Priority of security interests
6. Registration
7. Priority of security interests
8. Tangible assets; intangible assets
9. Enforcement of Security interests
10. Prior interests and transitional period

1. Who is a “grantor” under the Personal Property Security Act?

a. The person who grants a security interest in collateral to secure its own obligation or that of another person;
b. A buyer or other transferee of a collateral that acquires its right subject to a security interest;
c. A transferor in an outright transfer of an accounts receivable; or
d. A lessee of goods (R.A. 11057, Sec. 3 (c)).

2. What is a “Security Interest”?

- Security Interest is a property right in collateral that secures payment or other performance of an obligation,
regardless of whether the parties have denominated it as a security interest, and regardless of the type of
asset, the status of the grantor or secured creditor, or the nature of the secured obligation; including the
right of a buyer of accounts receivable and a lessor under an operating lease for not less than one (1) year
(RA 11057, Sec. 3 (i)).

3. What happens to the security interest in case the collateral is disposed of?

- A security interest shall continue in collateral notwithstanding sale, lease, license, exchange, or other
disposition of the collateral (RA 11057, Sec.9).

- Exceptions to the continuity of security interest:

a. If the party obtains the collateral, in the ordinary course of business, in good faith, he shall take the
movable property free of the security interest.
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 Note: No such good faith shall exist if the security interest in the movable property was registered prior
to his obtaining the property (RA. 11057, Sec. 21).

b. If agreed upon by the parties (RA 11057, Sec. 9).

4. Who is a “secured creditor”?

- A secured creditor is a person that has a security interest. For the purposes of registration and priority only, it
includes a buyer of account receivable and a lessor of goods under an operating lease for not less than one (1)
year (RA 11057, Sec. 3 (j)).

5. What are the specific rules governing interest over future property?

a. A security agreement may provide for the creation of a security interest in future property or after-acquired
assets, but the security interest in that property is created only when the grantor acquires rights in it or the
power to encumber it;
b. A security agreement may provide that a security interest in a tangible asset that is transformed into a product
extends to the product. A security interest that extends to a product is limited to the value of the encumbered
asset immediately before it became part of the product;
c. A security agreement may provide that a security interest in a tangible asset extends to its replacement. A
security interest that extends to a replacement is limited to the value of the encumbered asset immediately
before it was replaced (IRR of RA No. 11057, Sec. 3.05).

6. What are the specific rules governing security interest over proceeds and commingle funds?

a. A security interest in personal property shall extend to its identifiable or traceable proceeds;

b. Where proceeds in the form of funds credited to a deposit account or money are commingled with other
funds or money;

i. The security interest shall extend to the commingled money or funds, notwithstanding that the
proceeds have ceased to be identifiable, to the extent they remain traceable.
ii. The security interest in the commingled funds or money shall be limited to the amount of the
proceeds immediately before they were commingled; and
iii. The security interest shall be limited to the lowest amount of the commingled funds or money
between the time when the proceeds where commingled and the time the security interest is
claimed, if the balance credited or the amount of commingled funds or money is less than the
amount of proceeds immediately before commingling (RA No. 11057, Sec. 8).

7. What are the specific rules governing security interest over tangible assets commingled in a mass?

a. A security interest in a tangible asset that is commingled in a mass extends to the mass.
b. A security interest that extends to a mass is limited to the same proportion of the mass as the quantity of the
encumbered asset bore to the quantity of the entire mass immediately after the commingling (IRR of RA
No. 11057, Sec. 3.07).

8. How is security interest created?

- A security is created by a security agreement (RA 11057, Sec. 5).

9. What is a “security agreement”?

- The security agreement is the written contract signed by the parties that states the terms and conditions of
the agreement, including the description of the collateral (RA No. 11057, Sec. 6).

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10. When does a security interest become effective against third parties?

- A security interest becomes effective against third parties the moment it is perfected (RA 11057, Sec. 11 (b)).

11. When is a security interest perfected?

a. It has been created, and

b. The secured creditor has taken one of the following actions (RA 11057, Sec. 11):
i. Registration of a notice with the Registry;
ii. Possession of the collateral by the secured creditor;
iii. Control of investment property and deposit account (RA 11057, Sec. 12).

12. What are the special rules on priority for security interest in a deposit account and /or investment property?

a. A security interest in a deposit account with respect to which the secured creditor is the deposit-taking
institution or the intermediary shall have priority over a competing security interest perfected by any method.
b. A security interest in a deposit account or investment property that is perfected by a control agreement shall
have priority over a competing security interest except a security interest of deposit- taking institution or the
intermediary.
c. The order of priority among competing security interests in a deposit account or investment property that
were perfected by the conclusion of control agreements shall be determined on the basis of the time of
conclusion of control agreements.
d. Any rights to set-off that the deposit-taking institution may have against a grantor’s right to payment of
funds credited to a deposit account shall have a priority over a security interest in the deposit account.
e. A security interest in a security certificate perfected by the secured creditor’s possession of the certificate
shall have priority over a competing security interest perfected by registration of a notice in the Registry.
f. A security interest in electronic securities not held with an intermediary perfected by a notation of the security
interests in the books maintained for that purpose by or on behalf of the issuer shall have priority over a
security interest in the same securities perfected by any other method.
g. A security interest in electronic securities not held with an intermediary perfected by the conclusion of a
control agreement shall have priority over a security interest in the same securities perfected by registration
of a notice in the Registry.
h. The order of priority among completing security interest in electronic securities not held with an
intermediary perfected by the conclusion of control agreements is determined on the basis of the time of
conclusion of the control agreements (RA 11057, Sec. 18).

13. How is security interest enforced?

a. By expedited repossession (RA 11057, Sec. 47);

b. By recovery in special cases (RA 11057, Sec. 48);
c. By disposition (RA 11057, Sec. 49);
d. By retention of the collateral (RA 11057, Sec. 54).

14. What are the rules for expedited repossession by the secured creditor of the collateral?

a. Repossession without judicial process:

i. The secured creditor may take possession of the collateral without judicial process if the security
arrangement so stipulates: Provided, that possession can be taken without a breach of the peace.
ii. If the collateral is a fixture, the secured creditor, if it has priority over all owners and mortgagees,
may remove the fixture from the real property to which is affixed without judicial process. The
secured creditor shall exercise due care in removing the fixture.

b. Repossession with judicial process – If the assured creditor cannot take possession of collateral without
the breach of the peace, he may proceed as follows:
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 i. The secured creditor shall be entitled to an expedited hearing upon application for an order
granting the secured creditor possession of the collateral.
ii. The secured creditor shall provide the debtor, grantor, and, if the collateral is a fixture, any real
estate mortgagee, a copy of the application, including all supporting documents and evidence for
the order granting the secured creditor possession of the collateral; and
iii. The secured creditor is entitled to an order granting possession of the collateral upon the court
finding that a default has occurred under the security agreement and that the secured creditor has
a right to take possession of the collateral.

Note: Breach of the peace includes entering the private residence of the grantor without
permission, resorting to physical violence or intimidation, or being accompanied by a law
enforcement officer when taking possession of confronting the grantor (RA 11057, Sec. 47).

15. What is the effect of RA 11057 to prior interest?

- Prior interest that was perfected under prior law continues to be deemed perfected and remains effective
under RA 11057 notwithstanding that its creation did not comply with creation requirements of the PPSA and
its IRR until the earlier of:

a. The time the prior interest would cease to be perfected under prior law; and
b. The beginning of full implementation of the PPSA (IRR of RA No. 11057, Sec. 8.03).

REAL ESTATE MORTGAGE LAW

1. Definition and Characteristics

- REM is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, especially
subjecting to such security immovable property or real rights over immovable property in case the principal
obligation is not complied with at the time stipulated.

a. Object of REM
- immovables and alienable real rights may be the object of the contract of mortgage.

b. Right to alienate mortgage credit

- the mortgage credit may be alienated or assigned to a third person, in whole or in part, with the
formalities required by law. However, a stipulation forbidding the owner from alienating the
immovable mortgaged shall be VOID.

2. Essential requisite

- The essential requisites are as follows:

a. The mortgage be constituted to SECURE the fulfillment of the principal obligation
b. The mortgagor be the ABSOLUTE OWNER of the thing mortgaged; and
c. The persons constituting the mortgage have the FREE DISPOSAL of their property, and in the absence
thereof, that they be legally authorized for the purpose.

- Note: registration in the registry of property is necessary to bind third person but not to the validity of the
contract.

VI. QUASI-DELICTS

• Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to
pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this Chapter. (1997,2006,2007,2010,2013,2015
BAR)

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 - Culpa Aquiliana distinguished from Culpa Contractual. Both culpa contractual and culpa aquiliana are
violations of pre-existing obligations. However, they are different because the pre-existing obligation is derived
from contract in culpa contractual while in culpa aquiliana, the pre-existing obligation is derived from the general
obligation or duty to observe the standards of care set by society in dealing with other persons.

- Culpa Aquiliana distinguished from Culpa Contractual involving common carriage:

Culpa Aquiliana Culpa Contractual

There must be a perfected contract
The foundation of liability is contract.
The carrier must exercise extraordinary diligence in the
performance of its contractual obligation.
There is no need for a contract
The foundation of liability is the general duty of care owed
to the public.
The diligence required is diligence of a good father of a
family.

The common carrier (operator-owner) or employer is the Both the common carrier-employer and the employee are
person liable and not the employee (driver). liable.

The liability of the employer is direct and primary but not The liability of the common carrier-employer and the
solidary with the employee. negligent employee is direct, primary and solidary.

The liability is directly imposed on the employer-carrier
because of his own breach of the contract.
The employer-carrier cannot invoke the defense of
diligence in the selection and supervision of the employee.
Negligence is presumed the moment the passenger or
goods did not reach the destination or the moment the
passenger was injured or the moment the goods were lost
or damaged.
The liability imposed on the employer-carrier is vicarious or
imputed; he is made to answer for the negligence of the
employee.
The employer can invoke as a defense diligence in the
selection and supervision of the employee.
Negligence must be established as a requisite

- Culpa Aquiliana distinguished from Crimes. Crimes (ex delitos) under the Penal Code differ from culpa
aquiliana or quasi-delitos under the Civil Code:

1) Crimes affect the public interest, while cuasi-delitos are only of private concern;
2) The Penal Code punishes or corrects criminal act, while the Civil Code, by means of indemnification,
merely repairs the damage;
3) Delicts are not as broad as quasi-delicts, because the former are punished only if there is a penal law
clearly covering them, while the latter, cuasi-delitos, include all acts in which any kind of fault or
negligence intervenes; and
4) The liability of the employer of the actor-employee is subsidiary) in crimes while his liability is direct and
primary in quasi-delict

• Art. 2177. Responsibility for fault or negligence under the preceding article is entirely separate and distinct from
the civil liability arising from negligence under the Penal Code. But the plaintiff cannot recover damages twice
for the same act or omission of the defendant. (2003,2006 BAR)

- Proscription against double recovery: The plaintiff cannot recover damages twice for the same act or omission
of the defendant.

• Art. 2178. The provisions of articles 1172 to 1174 are also applicable to a quasi-delict.

• Art. 2179. When the plaintiff's own negligence was the immediate and proximate cause of his injury, he
cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the
injury being the defendant's lack of due care, the plaintiff may recover damages, but the courts shall mitigate the
damages to be awarded.

- Test of contributory negligence: The test is foreseeability. There is contributory negligence when the party’s
act showed lack of ordinary care and foresight that such act could cause him harm or put his life in danger.

- Emergency rule: An individual who suddenly finds himself in a situation of danger and is required to act
without much time to consider the best means that may be adopted to avoid the impending danger is not guilty

62
 of negligence if he fails to undertake what subsequently and upon reflection may appear to be a better solution,
unless the emergency was brought by his own negligence.

- Res ipsa loquitor: Where the thing which causes injury is shown to be under the management of the defendant,
and the accident is such as in the ordinary course of things does not happen if those who have the management
use proper care, it affords reasonable evidence, in the absence of an explanation by the defendant, that the
accident arose from want of care. Requisites for the application are:

1) the accident is of a kind which ordinarily does not occur in the absence of someone’s negligence
2) it is caused by an instrumentality within the exclusive control of the defendant or defendants; and
3) the possibility of contributing contract which would make the plaintiff responsible is eliminated.

- Doctrine of the last clear chance: Even if the plaintiff was guilty of antecedent negligence, the defendant is still
liable because he had the last clear chance of avoiding injury. The law is that the person who has the last fair
chance to avoid the impending harm and fails to do so is chargeable, with the consequences, without reference
to the prior negligence of the party. It is required that the both the plaintiff and the defendant (or their agents)
are negligent and one of them has the last clear chance of avoiding injury. If it was the defendant who had the
last clear chance of avoiding the injury, he would still be liable even if the plaintiff was also negligent.

• Vicarious liability: Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or
omissions, but also for those of persons for whom one is responsible. (1997,200,2001,2002,2003,2004,2005,
2006,2009,2010,2015 BAR)

The father and, in case of his death or incapacity, the mother, are responsible for the damages caused by the
minor children who live in their company.

Guardians are liable for damages caused by the minors or incapacitated persons who are under their authority
and live in their company.

The owners and managers of an establishment or enterprise are likewise responsible for damages caused by
their employees in the service of the branches in which the latter are employed or on the occasion of their
functions.

Employers shall be liable for the damages caused by their employees and household helpers acting within
the scope of their assigned tasks, even though the former are not engaged in any business or industry.

The State is responsible in like manner when it acts through a special agent; but not when the damage has
been caused by the official to whom the task done properly pertains, in which case what is provided in article
2176 shall be applicable.

Lastly, teachers or heads of establishments of arts and trades shall be liable for damages caused by their
pupils and students or apprentices, so long as they remain in their custody.

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they
observed all the diligence of a good father of a family to prevent damage.

- Persons whose liability is vicarious:

PERSON PERSONS FOR

WHOSE ACTS NATURE OF
VICARIOUSLY LIBILITY IS
DEFENSES
LIABILITY
LIABLE IMPUTED
Parents (Art. 2180, NCC Acts of their children up to Direct and Primary 1) The child is not living in
and Arts. 221 and 236 21 years old who live in their company
Family their company
Code) 2) Exercise of diligence of a
NOTE: Art. 221 of the good father of a family to
Family Code removes prevent damage.
the alternative qualification
between father and mother.

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 Guardians for Persons Minors or incapacitated Direct and Primary Exercise of diligence of a
under persons who are under good father of a family
their authority (Art. 2180, their authority and live in to prevent damage.
NCC) their company.

School, Administrators,
Teachers and Individual,
Entity or Institution Engage
in Child Care (Art. 218,
Family Code)
A child who is (i) a Minor,
(ii) under their supervision,
instruction or custody, (iii)
over which they exercise
special parental authority.
NOTE: The responsibility
applies to authorized
activities inside or outside
the school.
Direct, Principally and
Solidarily Liable
NOTE: The parents,
guardians or persons
exercising substitute parental
authority are subsidiarily
liable.
(1) The activity is not an
authorized activity;
(2) The child is not under
their supervision, instruction
or custody;
(3) Exercise of due
diligence.

Teachers or Heads of
Establishment of Arts and
Trade (Art. 2180, NCC).
Note: Schools and
Administrators are NOT
liable.
Pupils, students or Direct, primary and solidary (1) The student is not in
apprentices so long as they their
remain in custody - if they custody;
are no longer minors.
(For minor children, apply (2) Exercise of
Arts. 218 and 219 of the due diligence.
Family Code)

Employers (Art. 2180)
NOTE: It is NOT necessary
that they are engaged in any
business or industry.
Employees and household
helpers - in the service or,
on occasion of their
functions or the scope of
their task
Direct and primary and
solidary with employee
(1) The employee is not
performing his functions
or is acting beyond the
scope of his function;
(2) Exercise of due diligence
in the selection or
supervision of the employee

The State Special Agents - one who
receives a fixed order,
foreign to the exercise of
the duties of the official
Direct and Primary
The person who directly
caused the loss is not a
special agent – the official
was performing the task
that properly pertains to
him;

A Head of Department of
Government or superior
public officer (Sec. 38, Rev.
admin. Code of
1987)
Subordinates that he has Direct and Primary He did not give a written
authorized by written order order
the specific act or
misconduct

- Parents: Parents or guardians can still be held liable even if the minor is already emancipated by reaching the
age of 18 provided that he is below 21 years of age.

- School: The school is directly liable for injuries to students based on their contractual obligation when they
accepted the students. Its contractual obligations include the duty to provide safe facilities.

1) In PSBA vs. CA (2006) the school was made liable for the death of a student who was stabbed by an
outsider (not employee or teacher or student); the school must ensure that steps are taken to maintain
peace and order within the campus.
2) The school was made liable for breach of contract in Saludaga v. FEU (2008) when a student was
accidentally shot by a security guard. The school failed to provide safe environment for its student.

- Employers: It is not necessary that the employer is engaged in some industry or business. However, the
employer is liable only if the employee was performing his assigned task at the time the injury was caused
or is acting in furtherance of the interest of the employer at the time of the infliction of the injury or damage.

64
 1) An employee who uses his employer’s vehicle in going from his work to a place where he intends to eat
or in returning to work from meal is not ordinarily acting within the scope of his employment in the
absence of evidence of some special business benefit to the employer.

2) Art. 1712 provides that if the death or injury is due to the negligence of a fellow worker, the latter and the
employer shall be solidarily liable for compensation. If a fellow worker’s intentional malicious act is the
only cause of the death or injury, the employer shall not be answerable , unless it is shown that the latter
did not exercise due diligence in the selection or supervision of the plaintiff’s fellow worker that the
carpenter caused to the latter’s co-worker.

3) Fellow worker rule: If the death or injury is due to the negligence of a fellow worker, the latter and the
employer shall be solidarily liable for compensation.

- Registered owner rule: The registered owner is liable to the injured party subject to his right of recourse against
the transferee or the buyer.

- Municipal corporations: The LGU cannot escape liability by claiming that its official do not have knowledge
of the existence of excavations on its road; the obligation to make the road safe is continuing obligation.
(Mun. of San Juan MM vs. CA 2005)

• Art. 2183. The possessor of an animal or whoever may make use of the same is responsible for the damage
which it may cause, although it may escape or be lost. This responsibility shall cease only in case the damage should
come from force majeure or from the fault of the person who has suffered damage. (2010 BAR)

• Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the
vehicle, could have, by the use of the due diligence, prevented the misfortune. It is disputably presumed that a
driver was negligent, if he had been found guilty or reckless driving or violating traffic regulations at least twice
within the next preceding two months. (1996,1998,2002,2009 BAR)

If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.

• Art. 2187. Manufacturers and processors of foodstuffs, drinks, toilet articles and similar goods shall be liable for
death or injuries caused by any noxious or harmful substances used, although no contractual relation exists
between them and the consumers.

• Art. 2188. There is prima facie presumption of negligence on the part of the defendant if the death or injury
results from his possession of dangerous weapons or substances, such as firearms and poison, except when the
possession or use thereof is indispensable in his occupation or business.

• Art. 2189. Provinces, cities and municipalities shall be liable for damages for the death of, or injuries suffered by,
any person by reason of the defective condition of roads, streets, bridges, public buildings, and other public works
under their control or supervision.

• Art. 2190. The proprietor of a building or structure is responsible for the damages resulting from its total or
partial collapse, if it should be due to the lack of necessary repairs. (1990,2007 BAR)

• Art. 2191. Proprietors shall also be responsible for damages caused:

1) By the explosion of machinery which has not been taken care of with due diligence, and the inflammation
of explosive substances which have not been kept in a safe and adequate place;
2) By excessive smoke, which may be harmful to persons or property;
3) By the falling of trees situated at or near highways or lanes, if not caused by force majeure;
4) By emanations from tubes, canals, sewers or deposits of infectious matter, constructed without precautions
suitable to the place. (2002 BAR)

• Art. 2192. If damage referred to in the two preceding articles should be the result of any defect in the construction
mentioned in article 1723, the third person suffering damages may proceed only against the engineer or architect
or contractor in accordance with said article, within the period therein fixed. (2010 BAR)
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• Art. 2194. The responsibility of two or more persons who are liable for quasi-delict is solidary.

VII. DAMAGES

- Damnum absque injuria – damages will not be awarded in the absence of injury. Under this principle, the
legitimate exercise of person’s right , even if it causes loss to another, does not automatically result in an
actionable injury.

• Art. 2195. The provisions of this Title shall be respectively applicable to all obligations mentioned in article 1157.

• Art. 2196. The rules under this Title are without prejudice to special provisions on damages formulated elsewhere in
this Code. Compensation for workmen and other employees in case of death, injury or illness is regulated by special
laws. Rules governing damages laid down in other laws shall be observed insofar as they are not in conflict with this
Code.

• Art. 2197. Damages may be: (MENTAL)

1) Actual or compensatory;
2) Moral;
3) Nominal;
4) Temperate or moderate;
5) Liquidated; or
6) Exemplary or corrective.

• Art. 2198. The principles of the general law on damages are hereby adopted insofar as they are not inconsistent with
this Code.

ACTUAL OR COMPENSATORY DAMAGES

• Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or compensatory
damages. (1996,2004 BAR)

• Art. 2200. Indemnification for damages shall comprehend not only the value of the loss suffered, but also that
of the profits which the obligee failed to obtain. (2013 BAR)

• Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable
shall be those that are the natural and probable consequences of the breach of the obligation, and which the
parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may
be reasonably attributed to the non-performance of the obligation. (Note: whether foreseeable or unforeseeable)
(2004 BAR)

• Art. 2202. In crimes and quasi-delicts, the defendant shall be liable for all damages which are the natural and
probable consequences of the act or omission complained of. It is not necessary that such damages have been
foreseen or could have reasonably been foreseen by the defendant. (2013 BAR)

• Doctrine of avoidable consequences: Article 2203. The party suffering loss or injury must exercise the diligence
of a good father of a family to minimize the damages resulting from the act or omission in question.

• Art. 2205. Damages may be recovered: (1993 BAR)

1) For loss or impairment of earning capacity in cases of temporary or permanent personal injury;
2) For injury to the plaintiff's business standing or commercial credit.

• Art. 2206. The amount of damages for death caused by a crime or quasi-delict shall be at least three thousand pesos,
even though there may have been mitigating circumstances. In addition: (1993,2007,2014 BAR)
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 1) The defendant shall be liable for the loss of the earning capacity of the deceased, and the indemnity shall be
paid to the heirs of the latter; such indemnity shall in every case be assessed and awarded by the court, unless
the deceased on account of permanent physical disability not caused by the defendant, had no earning capacity
at the time of his death;
2) If the deceased was obliged to give support according to the provisions of article 291, the recipient who is
not an heir called to the decedent's inheritance by the law of testate or intestate succession, may demand
support from the person causing the death, for a period not exceeding five years, the exact duration to be
fixed by the court;
3) The spouse, legitimate and illegitimate descendants and ascendants of the deceased may demand moral
damages for mental anguish by reason of the death of the deceased.

- Loss of earning capacity: This may be awarded in case of death of the victim or if the victim was rendered
permanently incapacitated. The formula in computing the award for loss of earning capacity is as follows:

Net earning capacity = life expectancy x Gross annual income less necessary Living expenses

• Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.

• Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot
be recovered, except: (1994,2002,2013 BAR)

1) When exemplary damages are awarded;

2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
3) In criminal cases of malicious prosecution against the plaintiff;
4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid,
just and demandable claim;
6) In actions for legal support;
7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
8) In actions for indemnity under workmen's compensation and employer's liability laws;
9) In a separate civil action to recover civil liability arising from a crime;
10) When at least double judicial costs are awarded;
11) In any other case where the court deems it just and equitable that attorney's fees and expenses of litigation
should be recovered.

In all cases, the attorney's fees and expenses of litigation must be reasonable.

• Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

• Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.
(2002 BAR)

• Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in
the discretion of the court. (2002 BAR)

• Art. 2214. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he may
recover.

OTHER KINDS OF DAMAGES

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• Art. 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary
damages, may be adjudicated. The assessment of such damages, except liquidated ones, is left to the discretion
of the court, according to the circumstances of each case. (2013 BAR)

Moral Damages

• Art. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of
pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's
wrongful act for omission. (2002,2003 BAR)

- A right to moral damages is not transmissible to the injured party’s substitute because it is extremely personal
to injured party. (ICA vs. AMA Computer, 2011)

• Art. 2218. In the adjudication of moral damages, the sentimental value of property, real or personal, may be
considered.

• Art. 2219. Moral damages may be recovered in the following and analogous cases: (1996,2002,2004, 2006. 2009,
2013 BAR)

1) A criminal offense resulting in physical injuries;

2) Quasi-delicts causing physical injuries;
3) Seduction, abduction, rape, or other lascivious acts;
4) Adultery or concubinage;
5) Illegal or arbitrary detention or arrest;
6) Illegal search;
7) Libel, slander or any other form of defamation;
8) Malicious prosecution;
9) Acts mentioned in article 309;
10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also
recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of this
article, in the order named.

- brothers and sisters cannot recover moral damages for the death of their sibling. (Negros Sugar vs. Ibanez,
1968)

• Moral damages may also be awarded to: Art. 2220. Willful injury to property may be a legal ground for
awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The
same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. (1994, 2004,2005
BAR)

Nominal Damages

• Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or
invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the
plaintiff for any loss suffered by him. (1991,1994,2005 BAR)

- Cannot co-exist with actual damages: The purpose of nominal damages is to vindicate or recognize a right that
has been violated, in order to preclude further contest thereof and not for the purpose of indemnifying the
plaintiff for any loss suffered by him. An award of actual damages is a vindication of a right. An award of actual
damages is in itself recognition that plaintiff’s right was violated, hence, the award of nominal damages is
unnecessary and improper.

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• Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in article
1157, or in every case where any property right has been invaded.

- When proper: The award of nominal damages is proper in an action arising from any of the sources of obligation
under Art. 1157, when:

1) plaintiff suffered an injury

2) the injury arises because the legal right of the plaintiff is violated; and
3) there is no actual or other damages was established or other none appears on inquiry.

• Art. 2223. The adjudication of nominal damages shall preclude further contest upon the right involved and all
accessory questions, as between the parties to the suit, or their respective heirs and assigns.

Temperate or Moderate Damages

• Art. 2224. Temperate or moderate damages, which are more than nominal but less than compensatory
damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount
can not, from the nature of the case, be provided with certainty. (1994 BAR)

• Art. 2225. Temperate damages must be reasonable under the circumstances.

Liquidated Damages

• Art. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach
thereof.

• Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconscionable.

• Art. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the parties
in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation.

Exemplary or Corrective Damages

• Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good,
in addition to the moral, temperate, liquidated or compensatory damages. (2003 BAR)

- a stipulation whereby exemplary damages are renounced in advance shall be null and void.

- Requisites: The requisites for the award of exemplary damages are as follows:

1) Exemplary damages may be imposed by way of example in addition to compensatory damages, and only
after the claimant’s right to the them has been established;
2) They cannot be recovered as a matter of right, their determination depending upon the amount of
compensatory damages that may be awarded to the claimant; and
3) The act must be accompanied by bad faith or done in wanton, fraudulent, oppressive or malevolent
manner;
4) Art. 2234 (Must be satisfied)

• Art. 2230. In criminal offenses, exemplary damages as a part of the civil liability may be imposed when the crime
was committed with one or more aggravating circumstances. Such damages are separate and distinct from fines
and shall be paid to the offended party.

• Art. 2231. In quasi-delicts, exemplary damages may be granted if the defendant acted with gross negligence.

• Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner.

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• Art. 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they
should be adjudicated.

• Art. 2234. While the amount of the exemplary damages need not be proved, the plaintiff must show that he is
entitled to moral, temperate or compensatory damages before the court may consider the question of whether
or not exemplary damages should be awarded. In case liquidated damages have been agreed upon, although no
proof of loss is necessary in order that such liquidated damages may be recovered, nevertheless, before the court may
consider the question of granting exemplary in addition to the liquidated damages, the plaintiff must show that
he would be entitled to moral, temperate or compensatory damages were it not for the stipulation for liquidated
damages. (1991 BAR)

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 COMMERCIAL LAW REVIEW NOTES
Compilation of Memory Aid, Frequently Asked Questions in the Bar, Lex
Pareto, QUAMTO and Lecture Notes
By Jaybee D. Pascua (2021)

Commercial Law – 6 questions

i. Corporations (kinds of corporations, including corporations sole;

composition of / membership in board of directors; powers, duties and prerogatives of boards of directors
and stockholders; and articles of incorporation and by-laws)
ii. Intra-corporate dispute (concept)
iii. Intellectual property (copyright, including fair use principle and
moral rights)
iv. Insurance (what can be insured, claims for life insurance)
v. Republic Act No. 10173 (Data Privacy Act of 2012)

VIII. INSURANCE

A. CONCEPTS OF INSURANCE

1. What is a contract of insurance?

- is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage, or
liability arising from unknown or contingent event.

2. Who may be insured? (2000 BAR)

- Anyone except a public enemy may be insured. (Sec. 7)
- A public enemy designates a nation with whom the Philippines is at war and it includes every citizen or
subject of such nation.

B. ELEMENTS OF INSURANCE

1. Elements: (PARIS)

a) The insured has INSURABLE INTEREST;

b) The insured is subject to RISK OF LOSS by the happening of the designated peril;
c) The insurer ASSUMES the risk;
d) Such assumption of risk is part of general SCHEME to distribute actual losses among a large group of
persons bearing a similar risk; and
e) In consideration of the insurer’s promise, the insured pays a PREMIUM.

- Note: if the principal object and purpose of the organization are the assumption of risk and indemnification of
loss, the business is that of insurance. But if they are merely incidental and service is the principal purpose, the
business is not insurance (Philippine Health Care Providers vs. CIR, 2009)

C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS

1. RISK DISTRIBUTING DEVICE – all members of a group exposed to a particular risk contribute premiums to
an insurer, and from these contributory funds are paid whatever losses occur due to the exposure to the peril
insured against

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 2. ALEATORY – the contract is perfected upon its perfection although occurrence of a condition or event may
later dictate the demandability of certain obligations thereunder.

3. PERSONAL CONTRACT – the law presumes that the insurer considered the personal qualifications of the
insured in approving the insurance application.

4. CONTRACT OF ADHESION – most of the terms of the contracts do not result from mutual negotiations
between the parties as they are prescribed in printed form to which the insured may adhere if he chooses to but
which cannot change.

5. CONSENSUAL – the contract is perfected my mere consent without the need of delivery or any other formality.

6. CONTRACT OF INDEMNITY – except for life and accident insurance, the measure of an insurable interest
property is the extent to which the insured might be damnified by loss or injury thereof.

7. UBERRIMAE FIDEI CONTRACT – both parties must not only perform their obligations in good faith but
must avoid material concealment or misrepresentations as contract of insurance are one of utmost good faith.

D. WHAT MAY BE INSURED

Section 3. Any contingent or unknown event, whether past or future, which may damnify a person having an insurable
interest, or create a liability against him, may be insured against, subject to the provisions of this chapter.

The consent of the spouse is not necessary for the validity of an insurance policy taken out by a married person on his
or her life or that of his or her children.

All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of the person
insured shall automatically vest in the latter upon the death of the original owner, unless otherwise provided for in the
policy.

Section 4. The preceding section does not authorize an insurance for or against the drawing of any lottery, or for or
against any chance or ticket in a lottery drawing a prize.

Section 5. All kinds of insurance are subject to the provisions of this chapter so far as the provisions can apply.

E. LIFE INSURANCE

Section 181. Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith.

Every contract or undertaking for the payment of annuities including contracts for the payment of lump sums under a
retirement program where a life insurance company manages or acts as a trustee for such retirement program shall be
considered a life insurance contract for purposes of this Code.

Section 182. An insurance upon life may be made payable on the death of the person, or on his surviving a specified
period, or otherwise contingently on the continuance or cessation of life.

Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for
purposes of this Code.

In the absence of a judicial guardian, the father, or in the latter’s absence or incapacity, the mother, of any minor, who
is an insured or a beneficiary under a contract of life, health, or accident insurance, may exercise, in behalf of said
minor, any right under the policy, without necessity of court authority or the giving of a bond, where the interest of the
minor in the particular act involved does not exceed Five hundred thousand pesos (P500,000.00) or in such reasonable
amount as may be determined by the Commissioner. Such right may include, but shall not be limited to, obtaining a
policy loan, surrendering the policy, receiving the proceeds of the Policy, and giving the minor’s consent to any
transaction on the policy.

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In the absence or in case of the incapacity of the father or mother, the grandparent, the eldest brother or sister at least
eighteen (18) years of age, or any relative who has actual custody of the minor insured or beneficiary, shall act as a
guardian without need of a court order or judicial appointment as such guardian, as long as such person is not
otherwise disqualified or incapacitated. Payment made by the insurer pursuant to this section shall relieve such insurer
of any liability under the contract.

Section 183. The insurer in a life insurance contract shall be liable in case of suicide only when it is committed after the
policy has been in force for a period of two (2) years from the date of its issue or of its last reinstatement, unless the
policy provides a shorter period: Provided, however, That suicide committed in the state of insanity shall be compensable
regardless of the date of commission.

Section 184. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether
he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered.
Section 185. Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of
insurance upon life or health, unless thereby expressly required.

Section 186. Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of
indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

F. INSURABLE INTEREST

Basis: No contract or policy of insurance on property shall be enforceable except for the benefit of some person having
an insurable interest in the property insured. (Sec. 18)

1. Insurable Interest on Life insurance: (Sec. 10)

Every person has an insurable interest in the life and health: (2002, 2013 BAR)

a) Of himself, of his spouse and of his children;

b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest;
c) Of any person under a legal obligation to him for the payment of money, or respecting property or
services, of which death or illness might delay or prevent the performance; and
d) Of any person upon whose life any estate or interest vested in him depends.

- In general, the test is whether the person is interested in the preservation of the insured life despite the
insurance.

- In paragraph “a” of Section 10, mere relationship is sufficient while the rest (par. b, c, and d) requires
pecuniary interest. Thus, the interest of the creditor over the life of the debtor ceases upon full payment.

- 2013, 2015 BAR: Support need not be based on a legal obligation to support. With respect to spouses, the
insurable interest remains if they are separated.

- Section 11. The insured shall have the right to change the beneficiary he designated in the policy, unless he
has expressly waived this right in said policy. Notwithstanding the foregoing, in the event the insured does
not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.

- 2000, 2014 BAR - Insurance upon one’s life: An application for insurance on one’s own life does not usually
present an insurable interest question. In life insurance taken by a person on his own life, it is not necessary
for the beneficiary to have an insurable interest in the life insured.

2. Insurable Interest in property: (Sec. 13 & 14)

An insurable interest in property may consist in:

a) An existing interest;
b) An inchoate interest founded on an existing interest; or
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 c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.

- TEST: In general, a person has insurable interest in the property, if he derives pecuniary benefit or advantage
from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction whether he has
or has no title in, or lien upon, or possession of the property. (2000, 2014 BAR). Hence PECUNIARY
INTERET over the property is ALWAYS necessary although the interest is NOT limited to interest of the
owner.

- An heir has no insurable interest over properties that he will inherit. The execution of a last will and testament
does not vest to an heir, even a compulsory heir, insurable interest over the property that he will inherit as
stipulated in the will.

- BAR: A purchaser of goods under a perfected contract of sale already acquires interest on the property
pending the delivery.

- BAR 2010: Separate insurable interests: The mortgagor and the mortgagee have each an insurable interest
in the property mortgaged, and this is separate and distinct from each other. In case both of them take out
separate insurance policies in the same property, or some policy covering respective interests, the same is
not open to the objection that there is double insurance.

- 2000, 2014 BAR: Insurable interest in property is not necessarily an interest in property in the sense of title,
but a concern in the preservation of the property and such a relation to or connection with it as will
necessarily entail a pecuniary loss in case of its injury or destruction.

- 2009 BAR: An insurance taken out by a person on property in which he has no insurable interest is void.

- 2000, 2001 BAR: No contract or policy of insurance on property shall be enforceable except for the benefit
of some person having an insurable interest in the property insured.

3. Insurable interest in property vs. insurable interest in life (2001, 2002, 2012 BAR)

Insurable interest in property Insurable interest in life

I.I. in property is limited to the actual I.I. in life is unlimited (save in life
As to extent value of the interest thereon. insurance affected by creditor in the
life of the debtor
In property insurance, it is In life insurance, it is ENOUGH that
As to the TIME when NECESSARY that the I.I. exist when the I.I. exist at the time policy takes
insurable interest must the insurance takes effect AND the effect and need not exist at the time
exist loss occurs, but need not exist in the of the loss.
meantime. (2012 BAR)
As to There must be a legal basis to be The expectation of the benefit to be
EXPECTATION derived derived need not have any legal basis
of BENEFIT to be
derived
The beneficiary must have I.I. over The beneficiary need not have I.I.
the thing insured over the life of the insured if the life
As to of the insured himself secured the
BENEFICIARY’s policy. HOWEVER, if the life
interest insurance was obtained by the
beneficiary, the latter must have I.I.
over the life of the insured.

- 1991 BAR: The perfected contract of sale, even without delivery, vests in the vendee an equitable title, an
existing interest over the goods sufficient to be the subject of insurance.

- BAR: In property insurance, the insurance code requires that the insured must have insurable interest over
the property at the time of the perfection of the contract and at the time of the loss. Seller cannot recover
74
 because he had already sold the condominium unit at the time of the loss. Although “N” had I.I. over the
unit at the time of the inception of the policy, he did not have I.I. on the insured property at the time of the
loss. The buyer cannot also recover because he is not a party to the insurance contract. Contract of insurance
is a personal contract. The transfer of the property does not include the transfer of the insurance policy.

- BAR: In life insurance, it is only necessary that the person who took out the insurance on the life of another
has I.I. on such life at the time the policy takes effect. He need not have I.I. thereafter. Thus, the annulment
of the marriage with the insured will not prevent the recovery on the policy.

4. Insurable interest of the mortgagor and the mortgagee over the mortgaged property

a) Mortgagor – the mortgagor of property, as owner has an I.I. to the extent of its value, even though the
mortgage debt equals such value. The reason is that the loss or destruction of the property insured will not
extinguish the mortgage debt.

b) Mortgagee – the mortgage as such has an insurable interest in the mortgaged property to the extent of the
debt secured; such interest continues until the mortgage debt is extinguished (2000 BAR)

- BAR: An insurance procured by either the mortgagor or mortgagee will not inure to the benefit of the other.
Insurance is a personal contract, and just like any other contract, it takes effect only between the contracting
parties, their heirs, successors and assignees, unless it contains a stipulation in favor of third person.

5. Insurable interest of BENEFICIARY and ASSIGNEE of the policy

a) Property insurance – the beneficiary and the assignee must have I.I (1997 & 2001 BAR). Consent of the
insurer must be secured before the assignment.

b) Life insurance – If the insured takes the insurance on his own life, he can designate as beneficiary anybody
who does not have insurable interest (1997 & 2000 BAR). If a third person takes the policy, the beneficiary
must have I.I. In case of assignment, the assignee need not have insurable interest.

6. Sec. 24 - A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly
insured, to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease
upon an alienation of the thing insured.

G. RESCISSION OF INSURANCE CONTRACTS

INCONTESTABILITY CLAUSE (1996, 1997, 1998, 2012, 2013, 2014 BAR)

- After a policy of life insurance made payable on the death of the insured shall have been in force during the
lifetime of the insured for a period of two (2) years from the date of its issue or of its last reinstatement, the
insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.

- BAR SAMPLE ANSWER: Although there was material misrepresentation or concealment, the insurer is now
barred from questioning the policy of those grounds because of the incontestability clause. The policy of life
insurance of Juan had been in force for a period of more than two years from its issuance, hence, the policy has
become incontestable under Sec. 48 of the Insurance Code.

H. CLAIMS SETTLEMENT AND SUBROGATION

1. What are the rules on prescription of action to claim on an insurance policy? (1996 BAR)

a) A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an
action thereunder to a period of less than one (1) year from the time when the cause of action accrues, is
void. (Sec. 63) (BAR)

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 b) In the absence of stipulation or if the stipulation is void, the insured may bring an action within 10 years
in case the contract is written.

2. What is subrogation

- is the substitution of one person in place of another with reference to a lawful claim or right, so that he
who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies
or securities.

3. What is the basis of for the right of the subrogation in a contract of insurance?

- If the plaintiff’s property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the
contract.

4. Prescriptive period for the subrogee-insurer to file a claim against the wrongdoer based on quasi-delict?

- The prescriptive period is 4 years from the time the tort is committed against the insured by the wrongdoer.

IX. REVISED CORPORATION CODE

Corporation and Partnership are distinguished as follows:

Manner of creation
No. of Incorporators
Commencement of Existence
Powers that may be exercised
Management
Succession
Personal Liability
Transferability of Interest
Disolution
CORPORATION
created by law
generally requires a minimum of 5 and a
maximum of 15 incorporators. The
exception is a corporation sole
commences to have existence upon the
issuance of a certificate of incorporation
can only exercise powers allowed by law
managed by a board
enjoys the right of succession
stockholders do not have personal
liability beyond the value of their shares
one's interest in a corporation is
transferable without consent of the
stockholders
cannot be dissolved without the consent
of the state
PARTNERSHIP
created by agreement
requires a minimum of 2
commences to have existence upon
agreement
can exercise powers not contrary to law or
public policy.
managed by the managing partner
does not
liable beyond what they have contributed
it requires consent of the other partners
can be dissolved without the consent of the
state

- Section 11, of Revised Corporation Code, RA 11232

SEC. 11. Corporate Term. – A corporation shall have perpetual existence unless its articles of
incorporation provides otherwise.

Corporations with certificates of incorporation issued prior to the effectivity of this Code, and which
continue to exist, shall have perpetual existence, unless the corporation, upon a vote of its stockholders
representing a majority of its outstanding capital stock, notifies the Commission that it elects to retain its
specific corporate term pursuant to its articles of incorporation: Provided, That any change in the corporate
term under this section is without prejudice to the appraisal right of dissenting stockholders in accordance
with the provisions of this Code.

A corporate term for a specific period may be extended or shortened by amending the articles
of incorporation: Provided, That no extension may be made earlier than three (3) years prior to the original
or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined
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 by the Commission: Provided, further, That such extension of the corporate term shall take effect only on
the day following the original or subsequent expiry date(s).

A corporation whose term has expired may apply for a revival of its corporate existence, together
with all the rights and privileges under its certificate of incorporation and subject to all of its duties, debts
and liabilities existing prior to its revival. Upon approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless
its application for revival provides otherwise.

No application for revival of certificate of incorporation of banks, banking and quasi-banking

institutions, preneed, insurance and trust companies, non-stock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service business, and other financial intermediaries shall be
approved by the Commission unless accompanied by a favorable recommendation of the appropriate
government agency

A. CORPORATION DEFINED

The law defines a corporation as an artificial being created by operation of law having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence.

THE ATTRIBUTES OF A CORPORATION

1. created by operation of law

- When a corporation is said to be created by operation of law, it means that it cannot come into existence
without the consent or any grant of authority from the sovereign government.

- The grant of authority by the sovereign government is a concession. Thus the concept known as the
“Concession Theory ” or Government Paternity Theory" or the "Franchise Theory".

2. it is an artificial being

- The corporation is said to be an artificial being that is invisible and intangible, it is said to exist only in
contemplation of law.

- The corporation as a juridical person has a personality separate and distinct from the persons composing it

3. It only has the power, attributes and property expressly allowed by law or incident to its existence

- Corporations can only exercise those expressly authorized by law, can be implied or are necessary to carry out
its purposes, such as acts in the usual course of business or incidental to its existence because they attach to a
corporation upon its creation and said to be inherent such as the right of succession or to sue. Natural persons
or partnerships, on the other hand can exercise or perform any act provided it is not contrary to law. The
reason being that corporations owe their existence to the state, while natural persons or partnerships.

4. It has the right of succession

KINDS OF CORPORATIONS

1. A stock corporation is one whose capital stock is divided into shares and are authorized to distribute to the holders
of such shares dividends or allotments of the surplus profits on the basis of the shares held.

2. A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees
or officers, and when any profit is obtained as an incident of its operations shall, whenever necessary or proper be
used for the furtherance of the purpose/s for which the corporation was organized.

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- DIFFERENCES BETWEEN STOCK AND NON-STOCK CORPORATIONS
STOCK
Existence of capital Has capital stock divided into
stock shares
Purpose Organized for profit.
Distribution of profit Through dividends
Number of directors or Not less than 5 but not more
trustees than 15.
Except corporation sole and
banks (in case of merger and
consolidation which can have a
maximum of 21 directors
Term of office of 1 year until their successors are
directors elected and qualified, subject to
the provisions of AOI and by-
laws
Election of officers By the BOD
Place of meeting SH’s meeting shall be held in
city or municipality where the
principal office is located or at
the principal office
Right to vote SH can resort to cumulative
voting
Only preferred and redeemable
shares can be denied the right to
vote subject to some exceptions.
Voting of directors may be
made only through general
voting. Regional and district
voting of directors are not
allowed.
Transferability of Shares may be transferred with
shares/Membership or without consent of the
corporation
Right to expel SH may be expelled only for
members grounds provided by law
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NON-STOCK
No capital stock.
Its capital is in the form of contributions or
donations.
Not organized for profit.
Not distributed.
Any profits earned is used for the furtherance of the
purpose/s for which it was organized.
Not less than 5 and may be more than 15 except non-
stock educational institutions, max of 15 trustees
Subject to the provisions of AOI and by-laws, 3 years
on a staggered basis
It may have any number of trustees as fixed in the
Articles of Incorporation or By-law from the ranks
of its membership.
The term of the original trustees is such that 1/3 of
their number shall serve for a year, the second 1/3
for two years and the third 1/3 for three years
Trustees subsequently elected shall then serve for a
term of three years. Trustees elected to fill vacancies,
shall only serve for the unexpired portion.
The members elect corporate officers, unless
otherwise provided by Articles of Incorporation or
By-Laws.
May be held at any place outside the principal place
of business of the corporation
Provided, there be notice of the date, time, and place
and should always be in the Philippines.
No cumulative voting unless allowed by the AOI
Right to vote may be limited, broadened or denied
by the AOI or by-laws.
Unless so provided, each member is entitled to one
vote.
In exercising the right, he may vote by proxy and also
by mail or other similar means as authorized by the
Articles of Incorporation or By-Laws with the
approval of and under conditions prescribed by the
SEC
Regional and district voting of trustees are allowed.
Membership is personal in character and is not
transferable unless allowed by the AOI or by-laws
Membership shall be terminated in the manner and
for the causes provided in the AOI or by-laws
 Note that courts have no power to strip membership
as it constitutes an unwarranted and undue
interference with the right of a corporation to
determine its membership.

Termination of membership carries with it all rights

Distribution of Assets Assets of stock corporation
in case of dissolution shall be distributed in the
following order:
1. Payment of claims of
creditors who are not
stockholders (based on
preference of credit)
2. Payment of claims of SHs
as creditors
3. Residual balance is
distributed proportionately
to preferred shares, if any,
then to common stock.
to property and other privileges unless the By-Laws
provide otherwise. Note that admission is an
expressly granted power in the Corporation Code.
Assets of non-stock corporation shall be distributed
in the following order:
1. Payment of claims of creditors
2. Assets held on condition of return or subject to
limitation of use shall be returned, transferred or
conveyed.
3. Distribution to member based on distributive
rights stated in AOI or by-laws
In case of default, distribution pursuant to Plan of
Distribution of Assets.

3. NON-STOCK CORPORATIONS

- A non-stock corporation cannot amend its Articles of Incorporation and convert itself into a stock corporation
as the members are not entitled to share in the profits of the corporation as all present and future profits
belong to the corporation.

- CONVERSION: By converting to a stock corporation it will be deemed to have distributed corporate assets
among members without a prior dissolution. On the other hand, if it were a stock corporation at the onset, it
may be converted to a non-stock corporation as the corporation is not distributing assets without dissolution,
but rather, they are waiving their rights to any profits/dividends.

- DISTRIBUTION OF ASSETS UPON DISSOLUTION of a non-stock corporation

a. Liabilities and obligations of the corporation shall be paid, satisfied or discharged, or adequate provisions
made thereof;
b. Assets held under a condition requiring return, transfer, conveyance and which condition occurs by
reason of dissolution shall be returned, transferred, and conveyed;
c. Assets received and held by the corporation subject to limitations permitting use only for charitable,
religious, benevolent, educational or similar purposes, but not subject to return, transfer or reconveyance
by reason of dissolution shall be transferred to corporations undertaking similar activities pursuant to
the plan of dissolution;
d. Other assets shall be distributed in accordance with the Articles of Incorporation or By-Laws determining
the distributive rights of its members or as provided;
e. In any other case, assets shall be distributed to such persons, societies or organizations whether organized
for profit or not as provided in the plan of distribution.

- The plan of distribution must be consistent with the distribution rules above-outlined. This plan is adopted
pursuant to a majority vote of the Board of Trustees, then submitted for the affirmative vote of 2/3 of the
members having voting rights at a regular or special meeting, prior notice having been given.

4. DE JURE VS DE FACTO

a. DE JURE - A de jure corporation is one that is considered as a legally constituted corporation, having fully
complied with all the requirements of law.

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 b. DE FACTO – A de facto corporation is one that is so defectively created as not be a de jure corporation, but
nevertheless is the result of bona fide attempt to incorporate under existing statutory authority coupled with
the exercise of the corporate powers and is recognized by the courts as such upon grounds of public policy in
all proceedings, except upon a direct attack by the state questioning its corporate existence.

1) REQUISITES OF A DE FACTO CORPORATION

a) There is a valid law under which the corporation may be recognized.

b) There is a bona fide attempt in good faith to incorporate
c) There is an actual valid exercise of corporate powers.

- In general, a de facto corporation is deemed to have substantial legal existence except as against the
state.

- Consequently it has the same corporate power and liabilities like a de jure corporation. It is obliged to
pay taxes. Contracts that are entered into are valid and binding. It is allowed to bring suit.

- A de facto corporation can be a de jure corporation; a de facto can be corporation by estoppel; and a
corporation by estoppel can be de jure.

- Its existence is not open to a collateral attack. The only way by which is can be attacked is by way of
quo warranto proceedings to determine the right to the use or exercise of a franchise or office and to
oust the holder from his enjoyment of the same.

- Quo warranto proceeding is initiated by the Solicitor General because:

(a) it is the state's right or authority that is usurped

(b) it would produce endless confusion if it's existence is questioned in every suit that it is a party to
(c) it is in the public interest to maintain the validity of the business transactions entered into with de
facto corporations.

c. Difference between De Jure and De Facto

DE FACTO DE JURE
One which actually exists for all practical purposes as a One created in strict or substantial conformity with the
corporation but which has no legal right to corporate mandatory statutory requirements for incorporation.
existence as against the state.
There is a colorable compliance with the requirements of the There is substantial compliance with the requirements of the
law creating the corporation. law creating the corporation.
Can be attacked directly but not collaterally. Its right to exist as a corporation cannot be successfully
attacked or questioned by any party even in direct proceeding
for that purpose by the state.
Stockholders enjoy exemption from corporate liability for corporate obligations.

5. CORPORATION BY ESTOPPEL - A corporation by estoppel arises when the persons assume to act as a
corporation knowing it to be without authority to do so; in this case said persons shall be liable as general partners
for debts, liabilities and damages and it cannot, as a defense, neither can one dealing with it, resist performance.
Hence, one who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on
the ground that there was in fact no corporation.

6. CORPORATION BY PRESCRIPTION- A corporation by prescription is one that is not formally organized as

such but has been duly recognized for a substantial length of time as a corporation with rights and duties that are
enforceable under the law. In the Philippines, the Roman Catholic Church is recognized as such.

7. NUMBER AND QUALIFICATIONS OF INCORPORATORS

- The required number and qualification of Incorporators are:

a. 5 but not more than 15 persons, except when it is a corporation sole
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 b. Capacity to enter into a contract, the act of forming a corporation being a contractual in nature. Further,
the articles must be acknowledged to secure the state against the possibility of a fictitious name to be
subscribed and to furnish proof of signatures.
c. A majority must be residents of the Philippines. It is a mandatory requirement because the business is to
be conducted in the Philippines.
d. They must own or subscribe to at least one share of stock.

AMENDMENT OF ARTICLES OF INCORPORATION

1. GENERAL RULE:

- Amendments may take place by a majority vote of the board, and 2/3 vote or written assent of stockholders
or members. The original and amended articles are then submitted to the SEC with underscoring, duly certified
by corporate secretary (except corporation sole) and majority of the directors that it has been duly approved
by the required vote and in case of corporations that are regulated by another government agency, a favorable
recommendation must be submitted likewise. The rule that allows written assent does not apply when the object of the
amendment is to extend or shorten the term or increase or decrease capital stock.

2. NON-AMENDABLE ITEMS

a. Names of incorporators;
b. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital;
c. Names of the original directors;
d. Treasurer elected by the original subscribers;
e. Members who contributed to the initial capital of the non-stock corporation; and
f. Witnesses to and acknowledgement of the articles.

3. COMMENCEMENT OF CORPORATE EXISTENCE

a. REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION

- A corporation commences to have existence from the issuance by the SEC of a certificate of incorporation under
its official seal. The effect of which is to constitute its stockholders or members and their successors as a
BODY POLITIC and CORPORATE under the name and for the term stated in the articles.
- It is said to have been given de jure existence or can be said to be incorporated.
- The exception is a Corporation Sole, which is deemed incorporated upon filing of its Articles

b. WHAT MUST A CORPORATION DO AFTER INCORPORATION?

- A corporation has to formally organize and commence transaction of business within 2 years from date
of incorporation. If it fails to do so, its corporate powers cease and it is deemed dissolved.
- If it commences, but becomes continuously inoperative for 5 years, the same is ground for suspension
or revocation of the certificate.

4. CORPORATE MANAGEMENT

- THREE LEVELS OF CONTROL IN THE CORPORATE HIERARCHY

a. The board - which Dicker means corporate policy and prescribes the manner of general management
of its business activities. Towards this end, the law provides that all corporate powers of all
corporations formed under it shall be exercised, all business conducted and all property held by a
board of directors or trustees.

b. The corporate officers – are charged with the mandate to execute the decisions of the board and who,
oftentimes, determine the best manner by which the business is to be run. They are tasked to carry
out the policies laid down by the board, the AOI, and the by-laws.

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 c. The stockholders or members - who are considered as having residual power over fundamental
corporate changes as they are required by law to give their assent by the exercise of the right to vote.

5. DOCTRINE OF CENTRALIZED MANAGEMENT

- States that all corporate powers shall be exercised, all business conducted and all property held by a Board of
Directors or Trustees. It is the board which determines corporate policy and prescribes the manner of general
management of its business activities.

6. THREE INSTANCES WHERE DOCTRINE DOES NOT APPLY

- In case of delegation to the EXECOM duly authorized in the by-laws

- Authorization pursuant to a contracted manager, which may be an individual, a partnership, or a corporation
- In case of close corporations, the stockholders may manage the business of the corporation instead of a board,
if stated in the AOI

7. BUSINESS JUDGMENT RULE

- States that questions of policy or management are left solely to the honest decision of officers or directors of
a corporation and the courts or the SEC cannot interfere unless the acts are so unconscionable and oppressive
so as to amount to a wanton destruction of the rights of the minority or the directors are in bad faith or
committed gross negligence.

8. QUALIFICATIONS OF THE BOARD

a. He must own at least 1 share or at least it should be listed in his name as owner, if it is a non-stock corporation,
he must be a member;
- Ownership is absolutely necessary upon the assumption to the office of an elected director. Hence, a
person can be elected even if he does not own the stock at the time of election. If he is not a stockholder,
he may be considered an ex-officio member without voting rights in the board.
- A pledgee/mortgagee on the other hand cannot be elected. She may not be a stockholder for the present
time but upon assumption of office, it is absolutely necessary that he must own at least one share of
stock.

b. Every director/trustee must continuously own at least a share during his term or be a member;
c. A majority must be residents of the Philippines as the business primarily undertaken in the Philippines;
d. He must not have been convicted by final judgment of an offense punishable by a period in excess of 6 years
or a violation of the code, committed within a period of 5 years prior to the date of election;
e. Be a Filipino citizen in the instances required by law;
- Example: corporation engaged in mass media is required to be 100% owned and managed by Filipinos;
transportation 60/60 but 100 Filipino management

f. Such other qualifications as may be prescribed in the By-laws.

- While no age requirement has been provided by law, a stipulation allowing a minor to be elected as a
member of the board is not some corporate practice as they have limited capacity to act. It has also been
said that since incorporators are required to be of legal age, the same requirement should be applied to
subsequent directors.

9. DISQUALIFICATIONS OF THE BOARD

a. Conviction by final judgment of an offense punishable by imprisonment exceeding 6 years

b. Violation of the corporation code committed within 5 years prior to his election or appointment

10. DIFFERENT METHODS OF VOTING OF BOD

a. STRAIGHT VOTING – every stockholder may vote such number of shares for as many persons as there
are directors to be elected

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 b. CUMULATIVE VOTING FOR 1 CANDIDATE – a stockholder is allowed to concentrate his votes and
give one candidate as many votes as the number of directors to be elected multiplied by the number of his
shares shall equal
c. CUMULATIVE VOTING BY DISTRIBUTION – a stockholder may cumulate his shares by multiplying
the number of his shares by the number of directors to be elected and distribute the same among as many
candidates as he shall see fit.

11. INDEPENDENT DIRECTORS:

- An independent director is a person who, apart from his fees and shareholdings, is independent of management
and free from any business or other relationship which could, or reasonably perceived to interfere with his exercise of independent
judgment in carrying out his responsibilities as a director.

- Independent directors should always attend board meetings. Unless otherwise provided in the by-laws, their
absence shall not affect the quorum requirement. However, the Board may, to promote transparency, require
the presence of at least one independent director in all its meetings.

a. QUALIFICATIONS

1) He must not have any personality, financial, or professional ties with the corporation, its affiliates,
and subsidiaries that may adversely affect his ability to act objectively.
2) He must not have been employed in an executive capacity by the corporation, related to companies
or any of its substantial shareholders within the last five years.
3) He must not engaged in any transaction with the corporation, good companies or any of its
substantial shareholders, other than those conducted at arm’s length and are immaterial or
insignificant.
4) Ownership of at least one share - An independent director must not own more than 2% of the
shares of the company and/or covered companies or any of its substantial shareholders as per RA
8799. Object is to minimize the incidence of front of and conduct can the board and is meant to
call attention the deviations from the path of good corporate governance.
5) College graduate or has engaged or exposed to business of the corporation for not less than five
years, and
6) A person of integrity, probity and must be hard-working.

b. WHERE INDEPENDENT DIRECTORS REQUIRED

1) Issuers of registered securities to the public - requires at least 2 independent directors or 20% of
the board, whichever is lesser.
2) In a bank - requires at least 2.
3) A stock or securities exchange - requires at least 3, and the president must be an independent
director.
4) Finance companies, investment houses, brokers, investment companies, pre-need companies and
subsidiaries of foreign corporations operating and are listed in the Philippine Stock Exchange -
requires at least 1.

12. REMOVAL OF DIRECTORS

a. It must take place at the regular meeting of the corporation or special meeting called for that purpose;
b. There must be previous notice to stockholders or members of the intention to propose such removal. The
notice must be specific and in writing, by publication or sending of a copy of the notice; and,
c. The removal is affected by 2/3 vote of capital stock / members entitled to vote except that a director elected
by cumulative voting cannot be removed as it deprives the minority stockholders or members of their
representation.

- Any special meeting for the removal of directors is to be called by the Secretary on order of the President or
upon written demand of stockholders representing at least a majority of the outstanding capital stock or of
the members.

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 - If the Secretary, refuses, does not exist, or fails to give notice, the call for a meeting may be addressed directly
to stockholders or members by the stockholders or members signing the demand.
- The election of new directors may take place in the same meeting. In close corporations, when its articles
provide that it be managed by the stockholders.

13. HOW VACANCIES FILLED

a. Vacancies are filled by the stockholders or members if the cause is:

i. removal;
ii. expiration;
iii. other causes when the remaining members of the board do not constitute a quorum or leaves the
filling up of the vacancy to them;
iv. when there is an increase in the number of directors/trustees.

b. A vacancy can also be filled by the board if the cause of the vacancy is not removal or expiration and the
remaining members still constitute a quorum. This can only be exercised by the board if they acting within
their term.

- Should a vacancy arise due to causes other than removal or expiration, it may be filled by the board by
majority vote of the remaining directors if still constituting a quorum. Otherwise, the vacancy should be
filled by the stockholders or members in a regular or special meeting, the stockholder or member so
designated or elected shall only serve the unexpired portion of the term.

14. DELEGATION OF CORPORATE POWERS

GENERALLY, the exercise of corporate powers can be delegated.

EXCEPTIONS:

a. Power rests only with stockholders / members

b. Effect of delegation is to cede entire supervision/ control over the corporation
c. When the by-laws or authorization for an act restricts the delegation.
- A valid delegation can take place when the Corporation, acting through board and by resolution,
designates a particular person/s or entity to exercise specific corporate power subject to the above
stated limitations or when an executive committee has been created by and under the provisions of the
by-laws.

15. EXECUTIVE COMMITTEE

- The committee is a body composed of no less than 3 members of the board to whom corporate powers are
delegated to assure prompt and speedy action and solution without the necessity of board meetings and
manages the corporation between meetings of the board. It may act by majority vote on such matters that are
within the competence of the board as may be delegated to it in the by-laws or on majority vote of the board.

16. FORMAL ORGANIZATION

- Immediately after the election, the directors of the corporation must formally organize, by the election of a
president, who shall be the director, a treasurer, who may or may not be a director, a secretary who must be a
resident and citizen of the Philippines and such others as may be provided for in the by-laws.

- Any person may hold concurrent positions except that of the President-Secretary or President-Treasurer.

- An appointive or elected public official cannot serve as a corporate officer of any private bank except when
the service is incidental to the financial assistance provided by the government or a GOCC to the bank or
unless otherwise provided.

BY-LAWS NOT STATED IN THE BY-LAWS

Can be removed by the board Subject to rules on regular employees
Intra-corporate disputes – special commercial courts NLRC

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17. HOW CORPORATE POWERS EXERCISED

- Corporate powers are exercised and performed by the board through meetings.

- This so because it must act as a body and a decision must always be reached after affording opportunity for
consultation.

- In addition, directors or trustees have the power to act other than as a board.

- The exceptions are:

a) directors happened to be the only stockholders
b) act is undertaken by someone authorized by the board
c) stockholders wave the necessity of having a meeting
d) when there is an executive committee
e) when the Corporation enters into a management contract
f) when the act is ratified at a subsequent meeting.

THREEFOLD DUTIES OF DIRECTORS (Diligent, Loyal, Obedient)

1. They must be DILIGENT.

- Compliance with the duty of diligence requires the exercise of reasonable care, prudence, and equate
knowledge and skill.
- This duty is specifically imposed by the Corporation Code, when it provides that: directors or trustee who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence in directing its
affairs shall be liable jointly and severally with all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
- Corollary to this duty of diligence is the protection afforded to directors under the “BUSINESS JUDGMENT
RULE”. If in the course of management, they arrive at the decision for which there is a reasonable basis and
they acted in good faith, as the result of their independent judgment, and uninfluenced by any consideration,
other than what they believe to be for the best interests of the Corporation, it is not the function of the court
to say that it should have acted differently and to charge the directors for any loss or expenditures incurred.

2. They must be LOYAL to be keeping the interest of the corporation above personal motives.

- Compliance with this duty requires that the director act in a manner characterized by transparency,
accountability and fairness.
- The basic principle to be observed is that a director should not use his position to make profit or to acquire
benefit or take advantage for himself and/or his related interests.

a. SELF-DEALING DIRECTORS

GENERAL RULE:

- A contract between a self-dealing director and a corporation is voidable at the option of the
Corporation.

- Notwithstanding, the contract shall be valid when:

a) presence of the director/trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum;
b) his vote is not necessary to approve the contract;
c) that the contract is fair and reasonable under the circumstances. In the case of an officer, the
contract has previously approved by the board.

- If however, conditions (a) and (b) are absent, the contract may be ratified by 2/3 vote of the
outstanding capital stock in the meeting duly called for such purpose with full disclosure of the
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 adverse interest being made at the meeting and that the contract is nevertheless fair and
reasonable. Note that there is no requirement that the corporation suffers damage.

b. INTERLOCKING DIRECTORS

GENERAL RULE:

- Contract between corporations with interlocking directors is valid as long as there is no fraud
and the contract is fair and reasonable.

EXCEPTION:

- Voidable at the option of the corporation if a director's interest in one corporation is substantial
in his interest in the other corporation/s is nominal. The contract shall be subject to the
provisions of Section 32 insofar as the Corporation/s where he has a nominal share as it is as if
the Corporation is transacting with the self-dealing director. Shareholdings in excess of 20% of
the outstanding capital stock shall be considered substantial.

c. DISLOYAL DIRECTORS

i. DOCTRINE OF CORPORATE OPPORTUNITY (SEC 34)

- When a director is disloyal by virtue of his office, he acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profit, he must
account for it by refunding the same to the corporation, even if the director risked his own
funds in the venture, unless, his act is rectified by a vote of the stockholders owning or
representing 2/3 of outstanding capital stock.

ii. THE PROVISION DOES NOT APPLY IF:

1. he acts in good faith,

2. the Corporation is unable to undertake the opportunity or the same is not essential to the
corporation

iii. DISTINGUISHING BETWEEN SECTION 31 AND SECTION 34

SECTION 31 SECTION 34
Liability of directors, trustees, or officers Disloyalty of a director
(1) He willfully and knowingly votes or assents to He acquires for himself a business opportunity
patently unlawful acts of the corporation; which should belong to the corporation.
(2) He is guilty of gross negligence (not mere "want of
ordinary prudence" or bad
faith in directing the affairs of the corporation; and
(3) He acquires any personal or pecuniary interest in
conflict with his duty as such director or trustee.
The erring board members or officers He must account for it by refunding the same to
shall be held jointly and severally (or solidarily) liable the corporation, even if the director risked his own
for all damages resulting therefrom suffered by the funds in the venture.
corporation, its stockholders or members, or other
persons.
It speaks of the acquisition of any personal or It speaks of a violation of the general trust that is
pecuniary interest in conflict with his duty in respect reposed on a director.
to a matter reposed in him in confidence as to which
equity imposes a disability to deal in his own behalf, he
shall be liable as trustee and must account for all the
profits that would have otherwise accrued to the
Corporation.
What is violated is the trust specifically reposed.
Thus there is no ratification. Rectified by a vote of the stockholders owning or
representing 2/3 of outstanding capital stock

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3. They must be OBEDIENT by keeping within the powers of the corporation.

- The duty of obedience simply means that directors are bound to observe the limits of their authority.
- This means that the board must keep within the powers of the institution as prescribed in the articles of
incorporation, by-laws, and existing laws, rules and regulations.
- The above principle is embodied in the concept of ULTRA VIRES which is pronounced in the Corporation
code that: No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or
by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred.

PERSONAL/SOLIDARY LIABILITIES OF A DIRECTOR

1. Willfully and knowingly assents or votes about the unlawful act of the Corporation
2. Guilty of gross negligence or bad faith in directing the affairs of the Corporation.
Example is illegal dismissal of employees when attended by bad faith or malice, where they would be
solidarily liable with the Corporation.
3. Acquisition of any personal or backing any interest in conflict with his duty in respect of matter reposed in
him in confidence,
4. Consents to the issuance of watered stocks or having knowledge of the issuance of watered stock does not
quantify the corporate secretary in writing of the fact of issuance
5. Agrees to be personally liable
6. Made liable by specific provision of law

CORPORATE POWERS

1. The power to EXTEND OR SHORTEN the corporate term

- It is undertaken by a majority vote of the board and vote of 2/3 of the stockholders holding the corporation's
outstanding capital stock or members at the meeting, of which they were given notice addressed to them at
the given address as shown in the books of the corporation deposited at the post office or delivered personally.

- In case of an extension, a stockholder is allowed to exercise his appraisal right. This is also allowed when the
term is shortened.

2. Power to INCREASE OR DECREASE capital stock, incur create or increase corporate bonded
indebtedness

- Approved by a majority vote of the board of directors and, at a stockholders' meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded indebtedness.

a) PRE-EMPTIVE RIGHTS

- referring to the right to subscribe on issues or disposition of shares in proportion by stockholders

shareholdings

- The reason for its allowance is to preserve a stockholders unaltered and unimpaired influence in the
corporation. It does not apply to shares originally unsubscribed or undisposed.

GENERAL RULE: preemptive rights exist

EXCEPTION: maybe restricted when denied by the articles or an amendment thereto

- If the preemptive right is offered but not exercised, it does not follow that it will be offered to other
stockholders. If restricted by an amendment, a stockholder may exercise his appraisal right.

b) PRE-EMPTIVE RIGHTS NOT AVAILABLE

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 i. when the shares are issued in compliance with laws requiring stock offerings or minimum stock
ownership
ii. when the shares are issued in good faith with approval of stockholders representing 2/3 of the
outstanding capital stock in exchange for property needed for corporate purposes or
iii. when the shares are issued in good faith in payment of a previously contracted debt

3. The power to cause the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of corporate assets

- It is undertaken by a majority vote of the board and 2/3 vote of stockholders or members, written notice
having been given.

- In case of dissent, the right of appraisal maybe exercised.

a) NELL DOCTRINE

GENERAL RULE:

- Where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is
not liable for the debts and liabilities of the transferor.

EXCEPTIONS:

i. where the purchaser expressly or impliedly agrees to assume such debts;

ii. where the transaction amounts to a consolidation or merger of the corporations;
iii. where the purchasing corporation is merely a continuation of the selling corporation; and
iv. where the transaction is entered into fraudulently in order to escape liability for such debts (Edward J.
Nell Company v. Pacific Farms, Inc., 1965)

4. The power to acquire its own shares

- It can only be undertaken if it is for a legitimate corporate purpose/s provided that it has unrestricted retained
earnings.

a. CONDITIONS
i. Capital is not impaired
ii. There must be unrestricted retained earnings
iii. For a legitimate and proper purpose
iv. Corporation is in good faith and without prejudice to the stockholders’ rights
v. Condition of corporate affairs where if absent the conditions, there is a violation of the Trust
Fund Doctrine.

b. TRUST FUND DOCTRINE

- holds that the assets of the corporation as represented by its capital are trust funds that are to be
maintained unimpaired and to be used by the corporation to pay its creditors and that no
distribution of the same can be made without provisions for the payment of corporate debt.

- The subscribed capital stock of the corporation is a trust fund for the payment of the debts of the
corporation which the creditors have the right to look up to satisfy their credits, and which the
corporation may not dissipate.

c. EXCEPTIONS
i. Reduction of the authorized capital stock;
ii. Purchase of redeemable shares;
iii. Dissolution and eventual liquidation.

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5. The power to INVEST its funds in another corporation or business

- Can be undertaken by a majority vote of the board and 2/3 vote of stockholders or members.
- The investment contemplated by the provision is an investment in another corporation or business or for any
other purpose other than stated as its primary purpose.
- If the investment is reasonably necessary to accomplish its purpose as stated in the articles, stockholder or
member’s approval is not necessary.
- In case of dissent, the right of appraisal may be exercised.

6. A stock corporation has the power to declare DIVIDENDS.

a. GENERAL RULE: Only stockholders are entitled to a dividend as it is an incident of stock ownership.

b. EXCEPTION: When it is made to be about the stockholder on record at the specified date. If so, it is the seller
who is entitled to the dividend, except when there is a contrary stipulation. The rule also applies to other
unrecorded dispositions.

c. NATURE: DISCRETIONARY

- The board may declare dividends out of unrestricted retained earnings or total assets less liabilities and
total capital, payable in cash, in property or in stock on the basis of outstanding stock held by them. The
basis is the total subscription.

- Provided, however, that any cash dividend due on delinquent stock shall first be applied to the unpaid
balance, costs, and expenses or if it be a stock dividend, it is withheld until the unpaid subscription is paid.

d. MANDATORY

- When its surplus profits are in excess of 100% of paid in capital stock.

e. NOT MANDATORY or WITHHELD IF:

i. justified by definite corporate expansion projects or programs approved by the board

ii. prohibited by a loan agreement with any financial institution or creditor from declaring dividends without
its consent is not yet obtained
iii. shown that such retention is necessary under special circumstances obtaining in the corporation, as there
is a need for a special reserve for probable contingencies

f. KINDS OF DIVIDENDS

a) cash dividend
- the treatment of property dividend is as if it were a cash dividend
b) stock dividend

g. Difference between Cash Dividend and Stock Dividend

CASH DIVIDEND STOCK DIVIDEND

cash dividend is a disbursement of accumulated earnings
causes assets to diminish
when declared becomes property of the stockholder
does not increase capital
the declaration of a cash dividend creates a corporate debt
declared by the board
stock dividend is not a disbursement
process assets to increase
still part of capital and can still be reached by creditors
increases capital
does not create the debt
declared by the board with stockholders concurrence

h. CASH DIVIDEND DECLARATION

Cash dividends require only approval of the board of directors.
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 i. STOCK DIVIDEND DECLARATION

- Stock dividends are issued by resolution of the board of directors and approval of the resolution by the
stockholders representing 2/3 of the outstanding capital stock at meeting duly called for the purpose.
- For the declaration of stock dividends, a corporation must have also a sufficient number of authorized
unissued shares for distribution to stockholders; otherwise, it must increase its capital stock to the extent
of the corporate earnings to be declared and distributed as stock dividends.

7. The power to enter into a MANAGEMENT CONTRACT

- any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating agreements or otherwise.

a. REQUIRED VOTE:

Such contract shall have been approved by the board of directors and by the stockholders representing
majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and managed corporation, at a meeting duly called for the purpose.

b. EXCEPTION in two cases:

(1) where a stockholder or stockholders representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to
vote of the managing corporation;

(2) or where a majority of the members of the board of directors of the managing corporation also constitute
a majority of the members of the board of directors of the managed corporation (this situation applies to non-
stock corporation)

c. REQUIRED VOTE IN THESE CASES:

- Then the management contract must be approved by the stockholders of the managed corporation owning
at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation.

d. LIMITATIONS ON MANAGEMENT CONTRACTS

ULTRA VIRES ACTS

- Refers to an act outside or beyond express, implied, and incidental corporate powers.
- are acts that are in violation of the code as it provides that: no corporation shall possess or exercise corporate
powers except those conferred by the code, its articles and except as such are necessary or incidental to the exercise of the
powers conferred. Corporate Powers can either be express or implied (necessary to accomplish what
is express).
- UV Acts can be legal or illegal.
- It can be ratified only if it is legal.

e. TYPES OF UVA

i. Acts done beyond the powers of the corporation (thru BOD)

ii. UVA by corporate officers
iii. Acts or contracts which are per se illegal as being contrary to law

f. CONSEQUENCES OF ULTRA VIRES ACTS

If the contract entered into by the corporation is ULTRA VIRES, the following applies:

i. if merely executory on both sides, it cannot be enforced by either

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 ii. If fully performed, neither party can set it aside; can bind the parties if wholly or partly executed
iii. if performed on one side, recovery is allowed as retention of benefits without performance cannot be
allowed

g. RATIFICATION

- A rectification is possible provided the act is LEGAL.

- If ultra vires in part only and if separable, it is valid as to the part not ultra vires and invalid as to the
other part.
- If the act is not divisible, the act shall be entirely ultra vires.

h. APPLICABILITY OF ULTRA VIRES DOCTRINE

ULTRA VIRES ILLEGAL ACTS

Lawfulness Not necessarily unlawful, but outside Unlawful; against law, morals, public
the powers of the corporation policy, and public order
Enforceability Merely voidable and may be enforced Cannot be validated
by performance, ratification, or
estoppel
Ratification Can be ratified Cannot be ratified
Binding Effect Can bind the parties if wholly or partly Cannot bind the parties
executed

i. EXAMPLES OF ULTRA VIRES ACTS

- An increase in excess of the amount stated in the articles is ultra vires as there must be an amendment
of the articles and a reduction / increase of the capital stock can only decrease in the manner provided
for by law.

ADOPTION OF BY-LAWS

1. BY-LAWS
- The rules of action adopted by a corporation for its internal government and for the government of its
stockholders or members and those having the direction, management and control of its affairs in relation to
the corporation and among themselves.

2. Before Incorporation

- It is to be approved and signed by all incorporators and filed simultaneously with the articles

3. After incorporation

- Within a month after receipt of the certificate of incorporation.

- By-laws are adopted by the affirmative vote of stockholders or members representing a majority of the
outstanding capital stock or its members.
- It is to be signed by stockholders or members and is kept in the principal office subject to inspection.

4. BINDING EFFECT OF BY-LAWS

- By-laws cannot bind or affect 3rd persons that deal with the corporation unless they have full knowledge of
the pertinent portion of the by-laws affecting their transaction. This is by virtue of the PRINCIPLE OF
APPARENT AUTHORITY or Ostensible Authority.

5. DOCTRINE OF APPARENT AUTHORITY

- otherwise known as Doctrine of Ostensible Authority

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 - By the Doctrine of Apparent Authority, the corporation will be estopped from denying the agent’s authority
if it knowingly permits one of its officers or any other agent to act within the scope of an apparent authority
and it holds him out to the public as possessing the power to do those acts.
- “When in the usual course of business of the corporation, an officer or agent is held out by such corporation,
or has been permitted to act for it in such way as to justify third persons who deal with him in assuming that
he is doing an act or making a contract within the scope of his authority, the corporation is bound thereby
even though such officer or agent does not have the actual authority to do such act or make such contract.

6. AMENDMENTS TO THE BY-LAWS

- It can be undertaken by a majority vote of the Board and majority vote of stockholders or members in a
meeting duly called for that purpose.

- By vote of the Board, if the power to amend has been delegated by 2/3 vote of the outstanding capital stock
or members.

- Provided that the delegated authority may be revoked by majority vote of stockholders or members at a regular
or special meeting. Note the omission of the place at a meeting duly called for the purpose.

- The amendment is then attached to the original by-laws in the office of the corporation and a copy thereof
duly certified under oath by the secretary and a majority of the Board is filed with the SEC. It is effective upon
issuance by SEC of a certification that it is not inconsistent with the Code.

7. DIFFERENCE BETWEEN BY-LAWS and AOI

BY-LAWS
By-laws provide rules or regulations
By-laws are usually executed after incorporation
The filing of By-laws is a condition
ARTICLES
Articles is the fundamental law
Articles executed before incorporation
The filing of Articles is a condition precedent to
incorporation
In case, of a conflict between the Articles and the By-laws,
the former shall prevail as the Code provides that the
contents of the latter shall be subject to the contents of the
former. Hence, if the articles provide for a definite number
of directors, a contrary provision in the By-laws must yield
to the stated number in the articles

RIGHTS OF STOCKHOLDERS

- Under the Corporation Code, stockholders exercise and enjoy the following rights

1. right to attend and vote at meetings

2. elect or remove directors
3. approve corporate acts
4. adopt amend by-laws
5. compel the calling of a meeting
6. issuance of a stock certificate
7. receive dividends
8. receive property upon dissolution
9. transfer stock
10. pre-emption
11. inspection of books
12. secure financial statements
13. recover stock at delinquency if unlawfully sold
14. enter into voting trust agreements
15. exercise the right of appraisal
16. participate in dissolution
17. bring derivative suits

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- A summary of rights can be had as, follows:

1. right to dividends
2. right to participate in management
3. right to share in corporate property upon dissolution

- Note that a subscriber cannot exercise the right to demand the issuance of a stock certificate.

DERIVATIVE SUIT

- Is one brought by one or more stockholder/s or member in the name of the corporation and in its behalf to redress
wrongs committed against it or to protect or vindicate corporate rights whenever the officials of the corporation
refuse to sue, are the ones to be sued or hold control of the corporation.
- In a derivative suit, the wrong is inflicted directly on the corporation and indirectly upon the stockholders.
- It is an available remedy in cases where the officers are over compensated or there is a refusal to take action without
sufficient explanation.

REQUISITES of a DERIVATIVE SUIT:

a. There must be an existing cause of action
b. That demand to sue has been made, unless demand is useless
c. That he must have been a stockholder or member at the time the act was committed unless it be continuing
d. action is brought in the corporate name
e. no appraisal rights are available for activity complained of and that it is not a nuisance or harassment suit
f. The shareholder is a nominal party; the real party in interest is the corporation. It is an indispensable party.
g. The number of shares held is of no consequence. What is required is that the party bringing suit is a shareholder
without regard to the number of shares held.
h. he has tried to exhaust intra-corporate remedies

STOCKHOLDER'S INDIVIDUAL SUIT

- Is an action brought by a stockholder against the corporation for direct violation of his contractual rights as such
individual stockholder, such as the right to vote, the right to share in the declared dividends, the right to inspect
corporate books and records and similar other examples.
- It is an action brought in the name of the shareholder.
- When a wrong is directly inflicted against a shareholder, the latter can maintain an individual or direct suit in his
own name against the corporation.

REPRESENTATIVE SUIT
- When a wrong is committed against a group of stockholders, a stockholder may bring a suit in behalf of himself and
all other stockholders who are similarly situated.
- It is a kind of class action. Which saves the persons involved in the action substantial time and money.
- A representative suit is also the method used by minority stockholders to compel the declaration of dividends.

- NOTE: To determine the kind of suit, determine first the cause of action or whose right is going to be asserted, or whose right has
been violated?

PRIMARY OBLIGATIONS OF A STOCKHOLDER

a. Obligation to pay the corporation the consideration for his subscription, including interest when
required;
b. Obligation to pay the creditors of the corporation to the extent of their subscription, or beyond,
in case the doctrine of piercing the veil of corporate fiction is applicable

POWERS EXPRESSLY RESERVED BY LAW TO STOCKHOLDERS OR MEMBERS

a. removal of directors or trustees
b. grant of compensation, other than for per diems, to directors
c. rectification of acts of self-dealing directors or trustees, interlocking directors, disloyal directors
d. litigation of power to amend by laws
e. calling off a meeting, upon good cause, when no person is authorized to call it
f. management of the close corporation

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PERCENTAGE VOTING REQUIREMENTS FOR STOCKHOLDERS OR MEMBERS
- The required vote is usually 2/3 of the outstanding capital stock.

MAJORITY VOTE OF STOCKHOLDERS OR MEMBERS

a. election of members of the Board
b. removal of directors or trustees
c. approval of management contracts
d. adoption of by-laws/ its amendment or repeal and to revoke power of amendment delegated to the Board
e. fix issue price of no par value shares
f. fixing compensation of directors.

RIGHT OF APPRAISAL

- It is the right of stockholder to demand payment of the fair value of its shares after dissenting from a proposed
corporate action involving a fundamental change in the corporation in the cases provided for by law.

A. AVAILABLE WHEN? (Sec. 80, RCC)

1. Sale, lease, exchange, transfer, mortgage, pledge or disposition of all or substantially all of corporate assets or
property
2. Articles are amended and such has the effect of changing or restricting the rights of a shareholder or a class of
shares or authorizing preferences in any respect superior to those outstanding shares of any class
3. Mergers/consolidations
4. Extending or shortening the corporate term
5. A stockholder in a close corporation for any reason may compel the said corporation to allow the exercise of his
appraisal rights.
6. Investment by the corporation in another corporation or business other than its primary purpose

B. HOW IS IT EXERCISED ( Sec. 81, RCC)

1. The dissenting stockholder who votes against a proposed corporate action may exercise the right of appraisal by
making a written demand on the corporation for the payment of the fair value of shares held within thirty
(30) days from the date on which the vote was taken

- If no demand is made within 30 days, he is deemed to have waived the exercise of the right.

2. The stockholder must submit his certificate of stock within 10 days for notation that such shares are dissenting
shares (all the shares on record, hindi patingitingi).

- If the certificate is not submitted for notation within 10 days, the corporation may consider the exercise of the
right terminated at its option.

3. SEC. 82. Effect of Demand and Termination of Right. - Upon a demand, all rights accruing to the share are
suspended including voting rights including voting and dividend rights, except the right of such stockholder to
receive payment of the fair value thereof.

- Only the right to receive the fair value is not suspended.

- If there is no payment within 30 days after the award, he is restored to all his rights.

- However, the exercise of the right after demand is made, shall cease if: (Sec. 83, RCC)

(a) stockholder withdraws his demand and the corporation consents

(b) proposed action is abandoned or rescinded
(c) SEC disapproves the action, if its approval is necessary

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 (d) SEC determines that the stockholder is not entitled to the exercise of the right, in the effect is that he is
restored to all rights and accrued dividends are paid to him.

4. The corporation then pays the stockholder the fair value upon surrender of the certificate.

- The value paid is the value as of the day prior to the date on which the vote is taken, excluding any depreciation
or appreciation in anticipation of the corporate action.

- A transfer pending exercise of the right of appraisal shall cause the rights of the transferor as a dissenting
stockholder to cease and the transferee shall have all the rights of stockholder including the dividends which
would have accrued to the shares as by so buying, it indicates his desire to be a stockholder.

- If the right of appraisal is denied, the remedy is to sell your shares to someone who will not dissent to such
corporate action.

- If there is no payment within 30 days after the award, he is restored to all his rights.

- Provided, in all cases: (Sec. 81, RCC)

(a) no payment can be made if the corporation has no unrestricted retained earnings, and

(b) that the shareholder shall forthwith transfer his shares to the corporation

CLOSE CORPORATION

A close corporation is a corporation whose articles provide that:

1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more
than a specified of persons not to exceed 20.

2. All issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted in this
title.

ANY RESTRICTION CAN BE PUT PROVIDED:

a. the restriction must appear in the articles of incorporation/by-laws as well as the certificate of
stock, otherwise it is not binding on a purchaser in good faith

b. it or they should not be more onerous than that granting the existing stockholders or the
corporation the option to purchase the shares with such reasonable terms, conditions or periods
stated therein.

- If at the end/expiration of the period, a stockholder/s or the corporation falls to exercise the option to
purchase, the transferring stockholder may sell his shares to any third person. Example: fixing a price below
actual/market value, prescribing a longer holding period or a transfer without consent of the board.

3. The corporation must not list in any stock exchange or make any public offering of any of its stock of any class.

A. CHARACTERISTICS OF A CLOSE CORPORATION

1. Stockholders may act as directors without need of election, however, they shall assume all obligations and
liabilities of directors.
2. It may have a greater quorum requirement.
3. Pre-emptive rights extend to all stock issues, even treasury shares.
4. A stockholder may withdraw and avail of his right of appraisal

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B. CAN A CORPORATION BE STOCKHOLDER OF A CLOSE CORPORATION?

- YES as long as it does not own 2/3 of the voting stock or voting rights of the close corporation.
- Except if 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a
close corporation within the meaning of the Code, the corporation shall not be deemed a close corporation.

C. NO CLOSE CORPORATION

1. Mining
2. stock exchange
3. banks
4. insurance
5. public utility
6. educational corporations
7. are otherwise vested with public interest

D. DISTINGUISH CLOSE CORPORATION FROM ORDINARY STOCK CORPORATION

CLOSE CORPORATION ORDINARY STOCK CORPORATION

there is a limitation on shareholders none exists
there are restrictions of transfer No restrictions
there are qualifications that may be imposed for qualifications are not normally imposed
shareholders
a public offering of shares is prohibited there can be a public offering of shares
may be managed by shareholders always managed by a board

- Distinguished from a "closely held corporation" referring to the number of shareholders at a particular time,
indicating that they are few in number or a corporation whose shares are owned by a relatively small number of
shareholders.

E. ARTICLES OF INCORPORATION OF A CLOSE CORPORATION

In addition to what is required by Section 14 of the Code, the Articles of Incorporation of a close corporation may
provide for:
1. Classification of shares or rights and the qualifications for owning or holding them and restrictions on their
transfer
2. Classification of directors into one or more classes, each of which may be voted for or elected solely by a
particular class of stock
3. Greater quorum or voting requirements for stockholder or board meeting
4. Provide that the corporation's business shall be managed by the stockholder rather than the board as long as:
a) no meetings of stockholders are necessary to be called to elect directors
b) unless the context clearly requires otherwise, stockholders shall be deemed directors for the purpose
of applying the provisions of the code
c) stockholders and the corporation shall be subject to all liabilities of director
5. May provide that all officers or employees or that specified officers shall be elected or appointed by stockholders
instead of the Board.

- Note that the term of directors for a close corporation is 1 year as it is a stock corporation, while those in non-
stock corporations will have a term of 3 years and in an educational corporation the term is for 5 years.

F. PRE-EMPTIVE RIGHTS in a close corporation

- In a close corporation, pre-emptive rights extend to all stock issued, including a re-issuance of treasury shares,
whether for money, property, personal services or in payment of corporate debts unless the Articles otherwise
provide.

G. RIGHT OF FIRST REFUSAL in a close corporation

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 - In close corporations, restrictions reasonably protecting existing stockholders in their interests by giving them
or the corporation the option to purchase stock offered for sale, or the right of first refusal in case of sale of
stock at a given reasonable date before disposing of them to third persons are lawful as promotive of good
management and sound business enterprise.

H. DEADLOCKS

WHEN DOES IT OCCUR?

- Deadlocks occur if directors or stockholders are so divided regarding the management of the corporation's
business and affairs that the necessary vote cannot be obtained, the consequence of which is that the business
and affairs of the corporation can no longer be conducted to the advantage of stockholders.

WHO RESOLVE DEADLOCKS?

- Deadlocks are resolved by the SEC.

- The petition to resolve a deadlock is initiated by written petition by any stockholder notwithstanding any
contrary provision in the article or by-laws or agreements.

I. WITHDRAWAL OR DISSOLUTION

- Without prejudice to other remedies, a stockholder may for any reason compel the corporation to purchase his
shares at their fair market value, which shall not be less than the par or issued value when the corporation has
sufficient assets to cover debts and liabilities, elusive of capital stock.

ONE PERSON CORPORATION

- A One Person Corporation is a corporation with a single stockholder

- SEC. 120. Display of Corporate Name. – A One Person Corporation shall indicate the letters “OPC” either below
or at the end of its corporate name.

A. WHO MAY FORM ONE PERSON CORPORATION (OPC? (Sec. 116, RCC)

- only a natural person, trust, or an estate may form a OPC.

- A natural person who is licensed to exercise a profession may not organize as a OPC for the purpose of
exercising such profession except as otherwise provided under special laws.

- Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-chartered
government-owned and -controlled corporations may not incorporate as OPC

B. CAPITALIZATION (Sec. 117, RCC)

- OPC shall not be required to have a minimum authorized capital stock except as otherwise provided by special
law.

C. ARTICLES OF INCORPORATION AND BY-LAWS (Secs. 118-119, RCC)

- OPC shall file articles of incorporation in accordance with the requirements under Section 14 of this Code. It
shall likewise substantially contain the following:

(a) If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee,
administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties
together with the proof of such authority to act on behalf of the trust or estate; and

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 (b) Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation
of the authority.

- The OPC is not required to submit and file corporate bylaws.

D. OFFICERS (Secs. 121 and 123)

1. Director and President - The single stockholder shall be the sole director and president of the OPC (Sec. 121).

2. Treasurer - within fifteen (15) days from the issuance of its certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate secretary, and other officers as it may deem necessary, and
notify the Commission thereof within five (5) days from appointment.

- A single stockholder who is likewise the self-appointed treasurer of the corporation shall:
a. give a bond to the Commission in such a sum as may be required: and
b. undertake in writing to faithfully administer the One Person Corporation’s funds to be received as treasurer,
and to disburse and invest the same according to the articles of incorporation as approved by the
Commission. The bond shall be renewed every two (2) years or as often as may be required.

3. Corporate Secretary - The single stockholder may not be appointed as the corporate secretary.

- The single stockholder may not be appointed as the corporate secretary.

- SEC. 123. Special Functions of the Corporate Secretary. – In addition to the functions designated by the One
Person Corporation, the corporate secretary shall:

(a) Be responsible for maintaining the minutes book and/or records of the corporation;

(b) Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which notice
shall be given no later than five (5) days from such occurrence;

(b) Notify the Commission of the death of the single stockholder within five (5) days from such occurrence
and stating in such notice the names, residence addresses, and contact details of all known legal heirs; and

(d) Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the legal heirs with
regard to, among others, the election of a new director, amendment of the articles of incorporation, and
other ancillary and/or consequential matters.

E. NOMINEE AND ALTERNATE NOMINEE

1. SEC. 124. Nominee and Alternate Nominee. – The single stockholder shall designate a nominee and an alternate
nominee who shall, in the event of the single stockholder’s death or incapacity, take the place of the single
stockholder as director and shall manage the corporation’s affairs.

The written consent of the nominee and alternate nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in writing any time before the death or incapacity of the single
stockholder.

2. SEC. 125. Term of Nominee and Alternate Nominee. – When the incapacity of the single stockholder is temporary,
the nominee shall sit as director and manage the affairs of the One Person Corporation until the stockholder, by
self determination, regains the capacity to assume such duties.

In case of death or permanent incapacity of the single stockholder, the nominee shall sit as director and
manage the affairs of the One Person Corporation until the legal heirs of the single stockholder have been lawfully
determined, and the heirs have designated one of them or have agreed that the estate shall be the single stockholder
of the One Person Corporation.

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 The alternate nominee shall sit as director and manage the One Person Corporation in case of the nominee’s
inability, incapacity, death, or refusal to discharge the functions as director and manager of the corporation, and
only for the same term and under the same conditions applicable to the nominee.

3. SEC. 126. Change of Nominee or Alternate Nominee. – The single stockholder may, at any time, change its
nominee and alternate nominee by submitting to the Commission the names of the new nominees and their
corresponding written consent. For this purpose, the articles of incorporation need not be amended.

F. LIABILITY OF SINGLE SHAREHOLDER (Sec. 130, RCC)

- A sole shareholder claiming limited liability has the burden of affirmatively showing that the corporation was
adequately financed. Where the single stockholder cannot prove that the property of the One Person
Corporation is independent of the stockholder’s personal property, the stockholder shall be jointly and
severally liable for the debts and other liabilities of the One Person Corporation.

- Limited liability is applicable in OPC.. If the creditor/obligee ask for the solidary liablility of the single stock
holder (SSH), SSH must discharge his burden that the OPC is adequately financed. Only then If SSH cannot
discharged, he will be solidarily liable with the OPC.

- The principles of piercing the corporate veil applies with equal force to One Person Corporations as with other
corporations.

- Limited liability is not the same as piercing the veil. Limited liability poses the burden of showing that the OPC
is adequately financed while piercing the veil poses the grounds of perpetuate fraud, justify wrong and defeat
justice and burden is no longer applicable. But these principles have the same effect.

G. CONVERSION (Secs. 127-129, RCC)

1. SEC. 131. Conversion from an Ordinary Corporation to a One Person Corporation. – When a single
stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply for conversion into
a One Person Corporation, subject to the submission of such documents as the Commission may require. If the
application for conversion is approved, the Commission shall issue a certificate of filing of amended articles of
incorporation reflecting the conversion. The One Person Corporation converted from an ordinary stock
corporation shall succeed the latter and be legally responsible for all the latter’s outstanding liabilities as of the
date of conversion.

2. SEC. 132. Conversion from a One Person Corporation to an Ordinary Stock Corporation. – A One Person
Corporation may be converted into an ordinary stock corporation after due notice to the Commission of such
fact and of the circumstances leading to the conversion, and after compliance with all other requirements for
stock corporations under this Code and applicable rules.

In case of death of the single stockholder, the nominee or alternate nominee shall transfer the shares to the
duly designated legal heir or estate within seven (7) days from receipt of either an affidavit of heirship or self-
adjudication executed by a sole heir, or any other legal document declaring the legal heirs of the single stockholder
and notify the Commission of the transfer. Within sixty (60) days from the transfer of the shares, the legal heirs
shall notify the Commission of their decision to either wind up and dissolve the One Person Corporation or
convert it into an ordinary stock corporation.

The ordinary stock corporation converted from a One Person Corporation shall succeed the latter and be
legally responsible for all the latter’s outstanding liabilities as of the date of conversion.

DISTINCTION BETWEEN CONVERSION FROM OSC to OPC and OPC to OSC

- The conversion from Ordinary Stock Corporation (OSC) to OPC the qualification is when a single
stockholder acquires all the stocks of an OSC. Whereas, the conversion from OPC to OSC, is for whatever
reason.

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SPECIAL CORPORATIONS

KINDS:

A. EDUCATIONAL CORPORATIONS
- Are stock or non-stock corporations organized to provide facilities for teaching or instruction and are governed
by special laws and by general provisions of the code.

B. RELIGIOUS CORPORATIONS
- Are corporations incorporated by one or more persons and are classified as either a corporation sole or religious
society and is to be governed by this chapter and generally by other provisions governing non stock corporations.

C. A CORPORATION SOLE is one formed by the archbishop, bishop, priest, minister, rabbi, or other presiding
elder of a religious denomination, sector, or church for the purpose of administering and managing as trustee the
affairs, property, and temporalities or money revenues of such religious denomination, sect, or church.

D. A RELIGIOUS SOCIETY is the same as a corporation sole as far as purposes are concerned but incorporation
is brought about by 2/3 vote 5 or written consent of its members, who then file its articles with the SEC, verified
by affidavit of the presiding elder, secretary, clerk or member stating that:

a. that the society is a religious organization of some religious denomination, sect or church
b. that 2/3 of its members have given their written consent or vote to incorporate at a duly convened meeting
of the body
c. that its incorporation is not forbidden by competent authority or by constitution, rules, regulations or
discipline of the religious denomination, sect or church to which it belongs
d. that its purpose is to manage or administer its affairs, properties or estate
e. location of its principal office which must be in the Philippines
f. names, nationalities and residences of the trustees elected to serve the first year or such other period as
prescribed, which board must not be less than 5 nor more than 15

E. FOREIGN CORPORATIONS
- A foreign corporation is one formed or organized or existing under any laws other than the Philippines whose
laws allow Filipino citizens and corporations to do business in its own country or state.
- These corporations can transact business after it has obtained a license and a certificate of authority from the
appropriate government agency.
- Corporations already doing business in the Philippines with licenses can continue operating but must comply
with the provisions of the Code within 2 years.

§ SERVICE OF SUMMONS ON A FOREIGN CORPORATION

- The rules on service of summons on a foreign corporation are:
i. On the resident agent - Note if made on another while it has a resident agent, the summon is
inefficacious. It is also exclusive.
ii. On the SEC - if the corporation ceases to do business or there is no resident agent
iii. Any of its officers or agents in the Philippines - if the foreign corporation has neglected or refused
to appoint a resident agent.
iv. If the foreign corporation is not doing business, service may be made upon any agent, as provided
for by the 1997 Rules on Civil Procedure.

§ NECESSITY OF A LICENSE
- The purpose of the law in requiring that a foreign corporation doing business in the Philippines to be
licensed is to subject it to the jurisdiction of the courts.

- OBJECTIVES:
1. To place the foreign corporations under the jurisdiction of the court
2. To place them in the same footing as domestic corporation
3. To protect the public in dealing with the said corporation

§ TRANSACTION OF BUSINESS only for the purpose for which the corporation was issued a license.

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 - Upon the grant of a license, foreign corporations can now transact business. A license is no longer
absolutely necessary. It matters only when access to the court is the issue.

- If it is without a license, it can still transact business but the difference is that if it is transacting business
with a license it is permitted to maintain or intervene in any action suit or proceeding in any court or
administrative agency with the Philippines, otherwise it cannot maintain suit but may be proceeded
against before Philippine courts on any valid cause of action.

- Therefore if the foreign corporations is:

(a) transacting business with a license, it has access
(b) not transacting business and has no license, it has access
(c) transacting business without a license, it has no access
(d) transacting business without license but subject qualifications/exceptions, it has access.

§ WHAT CONSTITUTES DOING BUSINESS

A. THREE TESTS TO DETERMINE

1. Continuity test – doing business implies a continuity of commercial dealings and arrangements,
and contemplates to some extent the performance of acts or works or the exercise of some
functions normally incident to and in progressive prosecution of, the purpose and object of its
organization;
2. Subsequent test – a foreign corporation is doing business in the country if it is continuing the
body or substance of the enterprise of business for which it was organized; and
3. Contract test – whether the contracts entered into by the foreign corporation, or by an agent acting
under the control and direction of the foreign corporation, are consummated in the Philippines

- Transacting business is not determined by number of transactions or volume. A single act is not
merely incidental or casual but is of such a character as to distinctly indicate a purpose to do other
business in the state or the performance of act/s for which it was created.
- The volume or amount of business is not entirely determinative of whether it is transacting business
or not.

B. DOING BUSINESS CAN THUS BE INFERRED FROM:

a. continuous business acts or transactions
b. isolated transaction or business act if an inference can be drawn or of such a character as distinctly
to indicate a purpose or the part of the foreign corporations to do business and to make the state
the base of its operations for the conduct of its ordinary business.

C. BETTER DETERMINATION – an intent to make the Philippines as base of the corporation.

D. EXCEPTIONS

- UNLICENSED FOREIGN CORPORATION HAS THE CAPACITY TO SUE - If it is not

transacting or doing business in the Philippines, it can sue under: The isolated business transaction
rule

- ISOLATED BUSINESS TRANSACTION

i. When the foreign corporation is suing to seek redress for an isolated business transaction,
which is a transaction or a series of transactions set apart from the common business of a
foreign enterprise in the sense that there is no intention to engage in the progressive pursuit
of the object/purpose of the business organization.
ii. This is an exception as it is not the intention of the law to favor a domestic corporation who
later on repudiate obligations on account of the foreign corporation's lack of a license.

E. REQUISITES FOR ITS APPLICATION ARE:

(a) It must disclose that it is not doing business in the Philippines and is suing under the Isolated
Business Transaction Rule
(b) It must prove its juridical personality as a foreign corporation
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 (c) It must name its duly authorized representatives or resident agent.

1. A cause of action that is independent of any business transaction

2. A cause of action that arises out of a business transaction that is not entered into in the Philippines
- The foreign corporation is suing to enforce a right not arising out of business transaction with a party
in the Philippines. Example: failure of a shipping corporation to deliver goods shipped by the foreign
corporation or an insurer-subrogee sues to recover from a Philippine carrier for the amounts paid to
an insured
3. A cause of action to protect its name, reputation or goodwill subject to the rule on reciprocity
under the IPR.
- The foreign corporation is suing to protect its name, reputation and goodwill. If the foreign
corporations are well known through products bearing its corporate and trade names, it has a legal
right to maintain an action and it is also allowed by treaties to which the Philippines is a party to.

§ TO HOLD IT LIABLE FOR ACTS AND OMISSIONS

- That notwithstanding the above-situations, the Supreme Court has ruled:

“That the contract that is entered into is not void ab initio. Thus, when a foreign corporation which is doing business without
a license contracts with a third party, any defect will subsequently be cured if it obtains a license to transact business.”
- If a foreign corporation is doing business In the Philippines without a license, the move of the defendant
to dismiss the complaint that said foreign corporation filed might still be neutralized by invoking the
doctrine of estoppel.
- The Supreme Court adopted the in pari delicto rule holding that no remedy could be afforded to the parties
because of their presumptive knowledge that the transaction was tainted with illegality.

§ AMENDMENTS OF THE ARTICLES OR BY-LAWS

- Amendments are to be governed by the laws of the country of incorporation but it must within 60 days
after the effectivity of the amendment filed with the SEC and appropriate government agency, a duly
authenticated copy of the Articles or By-Laws clearly underscoring the changes, duly certified by the
authorized official of the state of incorporation, the filing thereof shall not of itself enlarge or alter the
purpose for which foreign corporation was granted a license.
- If so enlarged or amended it must obtain an amended licensed or if it changes its corporate name by
submitting an application with the SEC favorably enclosed by the appropriate regulating agency.

§ RULES TO OBSERVE WHEN SUING A FOREIGN CORPORATION OR VICE VERSA

- GENERAL RULE:Only foreign corporations that have been issued a license to operate a business in the
Philippines have the personality to sue.
i. The burden of proof to show that it is a foreign corporation transacting business or suing under any
of the exceptions is: on the foreign corporations by affirmatively pleading such fact.
ii. The defendant must specifically deny the allegation of a foreign corporation's capacity to sue.
iii. Proof of doing business is not necessary before jurisdiction is acquired.
iv. For purposes of suit, a foreign corporation is a resident of the Philippines on account of their being
found and operating in the Philippines.

- EXCEPTION: A party is estopped to challenge the personality of a foreign corporation to sue, even if it
has no license, after having acknowledged the same by entering to a contract with it.

- An unlicensed foreign corporation doing business in the country cannot maintain any action but it can be
sued.

§ PRINCIPLES GOVERNING A FOREIGN CORPORATION’S RIGHT TO SUE

1. if it does business without a license, it cannot sue before Philippine courts
2. if it is not doing business, it needs no license to sue before Philippine courts on an isolated business
transaction or on a cause of action entirely independent of any business transaction or to protect its
name, reputation or goodwill
3. if it does business with the required license, it can sue before Philippine courts on any transaction
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 § TOP-WELD MANUFACTURING, INC. VS. ECED, S.A., 138 SCRA 118 [1985]

- A party to a contract in pari delicto with a foreign corporation doing business in the Philippines without a
license is not entitled to relief from the latter. Thus, where a contract entered into by a Philippine
corporation with a foreign corporation for the manufacture and marketing of the latter's products is illegal
for failure to secure a prior license from the Board of Investments (under R.A. No. 5455.), the former
cannot ask the court to prohibit the foreign corporation from terminating the contract and giving the
production and distributorship rights to another. The parties are charged with knowledge of existing law at
the time they enter into a contract and at the time it is to become operative. Moreover, a person is presumed
to be knowledgeable about his own State law than his alien or foreign contemporary.

INTRACORPRATE DISPUTES:

- controversies arising out of intra-corporate or partnership relations, between and among stockholders, members,
or associations between any or all of them and the corporation, partnership or association of which they are
stockholders, members, or association respectively between such corporation, connected with the regulation of
the internal affairs of the corporation.

REQUIREMENTS:

1. the plaintiff must be a stockholder or member at the time the acts or transactions subject of the action occurred;
2. he exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
3. No appraisal rights are available for the act or acts complained of; and
4. The suit is not a nuisance or harassment suit.

JURISDICTION

Jurisdiction to hear an intra-corporate dispute is determined by:

(a) the status of the relationship between the parties, and
(b) nature of the question that is the subject of the controversy.

- If the controversy involves the contractual rights and obligations of the parties/stockholders and not the
enforcement of rights and obligations under the Corporation Code, jurisdiction belongs to the regular courts.

DISPUTE WITH AN INTRA-CORPORATE RELATIONSHIP WITHIN THE JURISDICTION OF THE

NLRC
- In the case of Cosare v. Broadcom Asia, Inc, G.R. No. 201298, February 5, 2014, the NLRC was held to have
jurisdiction over the dismissal of an AVP for Sales, who was also a stockholder, as he is not a corporate officer
whose dismissal is cognizable by the RTC.

- A corporate officer was defined as one who meets the following:

1. the creation of the position is under the corporation’s charter or by-laws; and
2. the election of the officer is by the directors or the stockholders.

CORPORATE ACTS WHICH REQUIRE THE VOTES OF BOD/BOT AND STOCKHOLDERS OR

MEMBERS

MAJORITY VOTE OF THE BOD

1. Vacancies in BOD if not due to removal, expiration of the term or increase of the number of directors
2. Power to acquire own shares
3. Power to declare dividends
4. Election of officers
5. Fixing the issued price of no-par value shares
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MAJORITY VOTE OF THE SH
1. Fixing of compensation of directors
2. Adoption of by-laws
3. Fixing the issued price of no-par value shares
4. Election of directors or trustees

MAJORITY VOTE OF THE BOD AND MAJORITY OF SH

1. Amendment or repeal of by-laws or adoption of new by-laws
2. Management contract

MAJORITY VOTE OF THE BOD AND 2/3 OF SH

1. Amendment of AOI
2. Dissolution of corporation - Voluntary
3. Adoption of plan or distribution of assets of non-stock corporation
4. Merger or consolidation
5. Lease, sale, exchange, mortgage, pledge, or dispose of all or substantially all of the corporate assets
6. Increase or decrease of capital stock
7. Incur, create, or increase bonded indebtedness
8. Investment of corporate funds in another corporation or for any business or for any other purpose other than
primary purpose
9. Extension or shortening of corporate term
10. Stock dividends’ Issuance

SH REPRESENTING 2/3 OF OCS

1. Denial of pre-emptive right
2. Delegation of the power to amend, repeal, or adopt new by-laws to BOD
3. Incorporation of religious societies
4. Removal of directors or trustees
5. Ratification of act of disloyal director
6. Ratification of contract of self-dealing directors

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 X. INTELLECTUAL PROPERTY CODE

A. COPYRIGHT

1. Definitions (Sec. 171)

- Copyright – right over literary and artistic works which are original intellectual creations in the literary and
artistic domain protected from the MOMENT of CREATION.

- Author - is the natural person who has created the work.

- Collective work - is a work which has been created by two (2) or more natural persons at the initiative and
under the direction of another with the understanding that it will be disclosed by the latter under his own
name and that contributing natural persons will not be identified.

- Joint work - is a work prepared by two or more authors with the intention that their contributions be merged
into separable or interdependent parts of a unitary whole, i.e., medical textbook that is jointly authored by 2
or more experts.

- Work of applied art - is an artistic creation with utilitarian functions or incorporated in a useful article,
whether made by hand or produced on an industrial scale;

2. When rights over copyrights are conferred? (Sec. 172)

- 1995, 2007, 2008 BAR: Rights over copyrights are conferred from the moment of creation. The work is
deemed created if something original is expressed in a fixed manner.

- 1997, 1998 BAR: Infringement could be committed from the moment the defendant copies the copyrighted
material. The right subsists from the moment of creation.

3. Who owns the copyright (Sec. 178, 1995, 2004, 2008, 2009, 2010, 2013 BAR)

a) One creator – creator, his heirs, or assigns owns the copyright

b) Joint authorship - the co-authors shall be the original owners of the copyright and in the absence of
agreement, their rights shall be governed by the rules on co-ownership.

Exception: If, however, a work of joint authorship consists of parts that can be used separately and the
author of each part can be identified, the author of each part shall be the original owner of the copyright in
the part that he has created;

c) In the case of work created by an author during and in the course of his employment - the copyright shall
belong to:
i. The employee, if the creation of the object of copyright is not a part of his regular duties even if
the employee uses the time, facilities and materials of the employer.
ii. The employer, if the work is the result of the performance of his regularly-assigned duties, unless
there is an agreement, express or implied, to the contrary.

d) Commissioned work – the person who so commissioned the work shall have ownership of the work, but
the copyright thereto shall remain with the creator, unless there is a written stipulation to the contrary;

e) Audiovisual work – the copyright shall belong to the producer, the author of the scenario, the composer of
the music, the film director, and the author of the work so adapted. However, subject to contrary or other
stipulations among the creators, the producer shall exercise the copyright to an extent required for the
exhibition of the work in any manner, except for the right to collect performing license fees for the
performance of musical compositions, with or without words, which are incorporated into the work; and

4. Copyrightable objects

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 Literary and Artistic Works

a) Books, pamphlets, articles and other writings;

b) Periodicals and newspapers;
c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or
other material form. (2010 BAR)
d) Letters – this includes electronic messages and sms messages (2007 BAR)
e) Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows;
f) Musical compositions, with or without words;
g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or
designs for works of art (2013 BAR)
h) Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial
design, and other works of applied art;
i) Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography,
architecture or science;
j) Drawings or plastic works of a scientific or technical character;
k) Photographic works including works produced by a process analogous to photography; lantern slides;
l) Audiovisual works and cinematographic works and works produced by a process analogous to
cinematography or any process for making audio-visual recordings;
m) Pictorial illustrations and advertisements;
n) Computer programs; and
o) Other literary, scholarly, scientific and artistic works.

Derivative Works

a) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or

artistic works; and

b) Collections of literary, scholarly or artistic works, and compilations of data and other materials which are
original by reason of the selection or coordination or arrangement of their contents.

5. Rights of Authors (Sec. 177) (1995 and 2008 BAR)

a) Economic Rights - economic rights shall consist of the exclusive right to carry out, authorize or prevent the
following acts:

i. Reproduction of the work or substantial portion of the work;

ii. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the
work;
iii. The first public distribution of the original and each copy of the work by sale or other forms of
transfer of ownership;
iv. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a
sound recording, a computer program, a compilation of data and other materials or a musical work
in graphic form, irrespective of the ownership of the original or the copy which is the subject of
the rental;
v. Public display of the original or a copy of the work;
vi. Public performance of the work; and
vii. Other communication to the public of the work.

b) Moral Rights

i. To require that the authorship of the works be attributed to him, in particular, the right that his
name, as far as practicable, be indicated in a prominent way on the copies, and in connection with
the public use of his work; (2008 BAR)
ii. To make any alterations of his work prior to, or to withhold it from publication;
iii. To object to any distortion, mutilation or other modification of, or other derogatory action in
relation to, his work which would be prejudicial to his honor or reputation; and
iv. To restrain the use of his name with respect to any work not of his own creation or in a distorted
version of his work.
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6. Fair use (Sec. 185) (1998 & 2014 BAR)

- Fair use is a privilege to use the copyrighted material in a reasonable manner without the consent of the
copyright owner or as copying the theme or ideas rather than their expression. The fair use of a copyrighted
work for criticism, comment, news reporting, teaching including multiple copies for classroom use,
scholarship, research, and similar purposes is not an infringement of copyright.

- 2014 BAR: The factors to be considered in determining whether the use made of a work is fair use shall
include:

a) The purpose and character of the use, including whether such use if a commercial nature or is for
non-profit educational purposes;
b) The nature of the copyrighted work;
c) The amount and substantially of the portion used in relation to the copyrighted work as a whole; and
d) The effect of the use upon the potential marked for or value of the copyrighted work.

7. Infringement

a) How made – When there is piracy or substantial reproduction. If so much is taken that the value of the
original work is substantially diminished or the labors of the original author are substantially and to an
injurious extent appropriated by another.

b) A person infringes a right protected under this Act when one (1977, 1980, 1994 BAR):
i. Directly commits an infringement
ii. Benefits from the infringing activity of another person who commits an infringement if the person
benefiting has been given notice of the infringing activity and has the right and ability to control
the activities of the other person.
iii. With knowledge of infringing activity, induces, causes or materially contributes to the infringing
conduct of another.

c) Remedies:

i. Injunction to prevent infringement

ii. Action for damages which should be filed within 4 years
iii. Criminal case

8. Limitations on Copyright / Acts that to do NOT infringe copyright (Sec. 184)

a) The recitation or performance of a work, once it has been lawfully made accessible to the public, if done
privately and free of charge or if made strictly for a charitable or religious institution or society; (1994 BAR)
b) The making of quotations from a published work if they are compatible with fair use and only to the extent
justified for the purpose, including quotations from newspaper articles and periodicals in the form of press
summaries: Provided, That the source and the name of the author, if appearing on the work, are mentioned;
c) The reproduction or communication to the public by mass media of articles on current political, social,
economic, scientific or religious topic, lectures, addresses and other works of the same nature, which are
delivered in public if such use is for information purposes and has not been expressly reserved: Provided, That
the source is clearly indicated;
d) The reproduction and communication to the public of literary, scientific or artistic works as part of reports of
current events by means of photography, cinematography or broadcasting to the extent necessary for the
purpose;
e) The inclusion of a work in a publication, broadcast, or other communication to the public, sound recording
or film, if such inclusion is made by way of illustration for teaching purposes and is compatible with fair use:
Provided, That the source and the name of the author, if appearing in the work, are mentioned;
f) The recording made in schools, universities, or educational institutions of a work included in a broadcast for
the use of such schools, universities or educational institutions: Provided, That such recording must be deleted
within a reasonable period after they were first broadcast: Provided, further, That such recording may not be
made from audiovisual works which are part of the general cinema repertoire of feature films except for brief
excerpts of the work;
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 g) The making of ephemeral recordings by a broadcasting organization by means of its own facilities and for use
in its own broadcast;
h) The use made of a work by or under the direction or control of the Government, by the National Library or
by educational, scientific or professional institutions where such use is in the public interest and is compatible
with fair use;
i) The public performance or the communication to the public of a work, in a place where no admission fee is
charged in respect of such public performance or communication, by a club or institution for charitable or
educational purpose only, whose aim is not profit making, subject to such other limitations as may be provided
in the Regulations;
j) Public display of the original or a copy of the work not made by means of a film, slide, television image or
otherwise on screen or by means of any other device or process: Provided, That either the work has been
published, or, that the original or the copy displayed has been sold, given away or otherwise transferred to
another person by the author or his successor in title; and
k) Any use made of a work for the purpose of any judicial proceedings or for the giving of professional advice
by a legal practitioner. (2006 BAR)

XI. SPECIAL LAW

REPUBLIC ACT No. 10173

DATA PRIVACY ACT
AN ACT PROTECTING INDIVIDUAL PERSONAL INFORMATION IN INFORMATION AND
COMMUNICATIONS SYSTEMS IN THE GOVERNMENT AND THE PRIVATE SECTOR, CREATING FOR
THIS PURPOSE A NATIONAL PRIVACY COMMISSION, AND FOR OTHER PURPOSES

Who is the DATA subject under this act

- refers to an INDIVIDUAL whose personal information is processed

Prohibited acts:

1. Unauthorized Processing of Personal Information and Sensitive Personal Information (Sec. 25)
2. Accessing Personal Information and Sensitive Personal Information Due to Negligence (Sec. 26)
3. Improper Disposal of Personal Information and Sensitive Personal Information. (Sec. 27)
4. Processing of Personal Information and Sensitive Personal Information for Unauthorized Purposes. (Sec. 28)
5. Unauthorized Access or Intentional Breach. (Sec. 29)
6. Concealment of Security Breaches Involving Sensitive Personal Information (Sec. 30)
7. Malicious Disclosure. (Sec. 31)
8. Unauthorized Disclosure. (Sec. 32)

What is Sensitive personal information

1. About an individual’s race, ethnic origin, marital status, age, color, and religious, philosophical or political
affiliations;
2. About an individual’s health, education, genetic or sexual life of a person, or to any proceeding for any offense
committed or alleged to have been committed by such person, the disposal of such proceedings, or the sentence
of any court in such proceedings;
3. Issued by government agencies peculiar to an individual which includes, but not limited to, social security
numbers, previous or cm-rent health records, licenses or its denials, suspension or revocation, and tax returns;
and
4. Specifically established by an executive order or an act of Congress to be kept classified.

Scope and Applicability

- This Act applies to the processing of all types of personal information and to any natural and juridical
person involved in personal information processing including those personal information controllers and
processors who, although not found or established in the Philippines, use equipment that are located in the
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 Philippines, or those who maintain an office, branch or agency in the Philippines subject to the immediately
succeeding paragraph: Provided, That the requirements of Section 5 are complied with.

Non-applicability of the Act:

a) Information about any individual who is or was an officer or employee of a government institution that relates
to the position or functions of the individual, including:
1) The fact that the individual is or was an officer or employee of the government institution;
2) The title, business address and office telephone number of the individual;
3) The classification, salary range and responsibilities of the position held by the individual; and
4) The name of the individual on a document prepared by the individual in the course of employment
with the government;
b) Information about an individual who is or was performing service under contract for a government institution
that relates to the services performed, including the terms of the contract, and the name of the individual given
in the course of the performance of those services;
c) Information relating to any discretionary benefit of a financial nature such as the granting of a license or permit
given by the government to an individual, including the name of the individual and the exact nature of the
benefit;
d) Personal information processed for journalistic, artistic, literary or research purposes;
e) necessary in order to carry out the functions of public authority which includes the processing of personal data
for the performance by the independent, central monetary authority and law enforcement and regulatory
agencies of their constitutionally and statutorily mandated functions. Nothing in this Act shall be construed as
to have amended or repealed Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act;
Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act; and Republic Act No. 9510,
otherwise known as the Credit Information System Act (CISA);
f) Information necessary for banks and other financial institutions under the jurisdiction of the independent,
central monetary authority or Bangko Sentral ng Pilipinas to comply with Republic Act No. 9510, and Republic
Act No. 9160, as amended, otherwise known as the Anti-Money Laundering Act and other applicable laws; and
g) information originally collected from residents of foreign jurisdictions in accordance with the laws of those
foreign jurisdictions, including any applicable data privacy laws, which is being processed in the Philippines.

Extraterritorial Application.

This Act applies to an act done or practice engaged in and outside of the Philippines by an entity if:

a) The act, practice or processing relates to personal information about a Philippine citizen or a resident;
b) The entity has a link with the Philippines, and the entity is processing personal information in the Philippines
or even if the processing is outside the Philippines as long as it is about Philippine citizens or residents such as,
but not limited to, the following:
1) A contract is entered in the Philippines;
2) A juridical entity unincorporated in the Philippines but has central management and control in the
country; and
3) An entity that has a branch, agency, office or subsidiary in the Philippines and the parent or affiliate of
the Philippine entity has access to personal information; and

c) The entity has other links in the Philippines such as, but not limited to:
1) The entity carries on business in the Philippines; and
2) The personal information was collected or held by an entity in the Philippines.

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